Britain still faces a “challenging period of uncertainty and adjustment” in the wake of the Brexit vote, the Bank of England has warned in a wake-up call to those who are arguing that the worst is over.
The Bank’s Financial Policy Committee acknowledges in a statement today that markets have calmed down since the immediate volatility in the wake of the referendum vote on 23 June – when the value of sterling plunged more than 10 per cent in days – but it pointed to a host of still elevated risks.
The Bank singled out the ongoing threat of a “sharp adjustment” in the commercial real estate market and the danger overseas investors could yet decide to divert money flows away from the UK.
“Any disorderly adjustment in capital flows would be associated with tighter funding conditions for the UK real economy,” it said.
The FPC also warned that if the economy weakens and hiring slows – as most independent forecasters still expect, even if fewer now expect an outright recession – it may become harder for many indebted households to service their debts.
“These vulnerable households could affect broader economic activity by cutting back sharply on expenditure in order to service debts,” it said.
The FPC also warned that the risks to the UK financial system from abroad remained “elevated”, citing concerns over the health of the European banking system and still spiralling debt levels in China.
The Bank will publish the results of its latest round of stress tests for UK banks in November.
In its annual review of the Treasury’s Help to Buy Mortgage Guarantee scheme the FPC said the controversial scheme did not present any “material” financial risks – but also noted that its closure at the end of this year would be unlikely to have any impact on the overall availability of mortgages.
The guarantees for households with small deposits were introduced by the previous Chancellor George Osborne and critics said they increased demand for housing at a time of restricted supply, boosting prices dangerously.
Immediately after the referendum vote the Bank’s Governor Mark Carney announced that it was making £250bn of emergency short-term funding available to banks should they need it, in order to head off the threat of a run by wholesale funders.
And in the month after the referendum vote the FPC reversed a planned mandated increase in the capital buffers of UK banks, in a move designed to encourage them to carry on lending.
Mr Carney argued before the Treasury Select Commitee earlier this month that this swift action – combined with a cut in interest rates to 0.25 per cent – is one of the reasons why the Brexit vote shock has so far been less severe than some predicted.
In July there was a run by investors on a number of UK real estate investment funds, forcing managers to block redemptions although some have since reopened.
