In World Economy News 01/07/2016
Bank of England Governor Mark Carney on Thursday declared his confidence in the U.K.’s ability to successfully adapt to a future outside the European Union, delivering a message of reassurance despite saying that growth will slow in coming months and that further cuts in interest rates and other measures will be needed.
In advance of the U.K.’s June 23 referendum, the BOE had warned that growth could slow as consumers and businesses responded to heightened uncertainty by cutting spending. In a speech to business people and bankers, Mr. Carney said that was now the bank’s expectation.
Mr. Carney said it was his personal view that the central bank would need to cut its key interest rate “over the summer,” adding that an initial assessment of the economic damage would be made at the Monetary Policy Committee’s July meeting, and a “full assessment” alongside new forecasts for growth and inflation in August. That suggests he favors an August move, while leaving the door open to an earlier decision.
He added that the BOE has a range of other tools with which to support the economy and support the banking system, a hint that a revival of its bond buying program is possible, while he noted that the Financial Policy Committee–which sets the rules for banks–could take action when it meets Tuesday. However, he once again noted the disadvantages of cutting the key interest rate below zero, which he warned could “perversely” reduce the availability of credit.
Further out, Mr. Carney declared himself confident in the U.K.’s capacity to make the best out of what he described as “a major regime shift.”
“The U.K. can handle change,” he said. “It has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law. The question is not whether the U.K. will adjust, but how quickly and how well.”
However, Mr. Carney said the BOE couldn’t drive that adjustment, saying the responsibility for future prosperity lay in the hands of political leaders.
“The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policy makers,” he said. “These will be driven by much bigger decisions; by bigger plans that are being formulated by others.”
The vote to leave the EU has cast a pall of uncertainty over the U.K. economy that has been exacerbated by political upheaval. Prime Minister David Cameron resigned Friday, triggering a leadership race in the governing Conservative Party that further clouds the outlook.
Mr. Carney stepped in to soothe financial markets in the immediate aftermath of the shock Brexit vote, pledging Friday the BOE would backstop the financial system with at least GBP250 billion ($334 billion) of loans to banks that needed them.
The biggest unknown for British businesses is the degree of access they will have to the EU’s single market after Britain leaves the bloc. They are unlikely to have much clarity on that question for some time, since the U.K. appears unwilling to start the process of leaving the EU much before the end of 2016, and will then have two years in which to complete negotiations on the terms of its withdrawal.
Source: Dow Jones
