Friday 23 February 2018

Weak Dollar Means Fed Rate Hikes Pose Low Asia Threat, NAB Says

In World Economy News 23/02/2018

Asia is in a good position to ride out interest-rates hikes from the Federal Reserve, given prospects of a weaker dollar and a solid outlook for exports, according to Christy Tan, National Australia Bank Ltd.’s head of markets strategy in Singapore.
In three of the last four Fed tightening cycles, the dollar has weakened, a pattern that bodes well for a basket of Asian currencies that’s already rising against the greenback this year, said Tan. While that would ordinarily reduce the competitiveness of export-reliant economies in Asia, strong global growth is keeping demand buoyant, she said.
“If you look at what led to the Asia recovery recently, it’s actually exports,” said Tan. “It basically shows the currencies aren’t overly priced. And demand globally is recovering quite strongly, so much so that maybe the price effect is more or less diluted.”
For Asian central banks, that means less pressure on them to move in lockstep with the Fed. An ongoing search for yield and a healthy macro-economic outlook puts policy makers in a “sweet spot,” and while they can hike interest rates if they need to, there are no signs of overheating that require more urgency, Tan said.
Investors should also keep an eye on the “twin deficit” in the U.S., Tan said, with government spending projected to increasingly dwarf revenues and imports continuing to vastly outpace exports. Markets could all too easily understate the weakness in the U.S. dollar going forward, she said.
“When the twin deficit mattered more, the dollar doesn’t seem to respond as greatly to the rate hike tightening cycle,” she said of the last few Fed rate-hike cycles.
Greater spending on services, including online, has removed a bit of the currency performance impact on external trade, Tan said.
“All this makes Asia look stronger in terms of providing some kind of a shock buffer to a tightening environment,” she said.

Source: Bloomberg

Fed’s Quarles Says U.S. Economy in ‘Best Shape’ Since Crisis

In World Economy News 23/02/2018

Federal Reserve Governor Randal Quarles delivered an upbeat assessment of the U.S. economy and endorsed a “gradual” path for raising interest rates in his first public speech on monetary policy since joining the central bank in October.
“The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis,” Quarles said in prepared remarks Thursday in Tokyo.
“With a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized,” he said. The views appear to align Quarles on monetary policy with Fed Chairman Jerome Powell, who testifies next week before Congress for the first time as central bank chief.
His comments follow the release of minutes from the Fed’s Jan. 30-31 policy meeting that showed confidence growing among policy makers that growth in 2018 may exceed their December forecasts and justify additional rate hikes this year. Officials have penciled in three hikes in 2018, according to their median projection released in December.
Quarles, who was named to the central bank’s board by President Donald Trump, said recently enacted tax changes and bipartisan budget deals could help sustain the economy’s expansion by increasing demand and spurring business investment. He also drew attention to capital investment data that had already improved in 2017.
‘Drought’ Fading
“It might be early, but it is possible that the investment drought that has afflicted the U.S. economy for the past five years may finally be breaking,” he said.

On the riddle of lower-than-expected inflation in 2017, Quarles said it was likely due to “transitory factors that will fade through 2018.”
“A deviation from our target of a few tenths of 1 percentage point, especially one I expect to fade, does not cause me great concern,” he said.
Quarles, who’s also the Fed’s vice chairman for supervision of financial institutions, said he hoped to improve the regulatory framework the Fed and other agencies spent a decade putting in place after the financial crisis of 2008-09. His appointment to that role has spurred warnings from Democratic lawmakers not to dismantle post-crisis reforms.
“Given the breadth and complexity of this new body of regulation, it is inevitable that we will be able to improve them, especially with the benefit of experience and hindsight,” he said.

Source: Bloomberg

Bright Spending Outlook To Boost Eurozone Recovery This Year

In World Economy News 23/02/2018

Despite declining in February, Eurozone consumer confidence still point to a bright household spending growth in the near future and this may boost economic recovery this year, Stephen Brown, an economist at Capital Economics, said.
The consumer confidence index dropped for the first time in seven months in February, to 0.1 from 1.4 in January, data from the European Commission showed on February 20. However, the index remained well above the long-run average of -12.0, the economist observed.
Consumer confidence was probably hit by the sharp fall in global equity prices at the start of February, Brown noted.
The economist said the sentiment index remains consistent with annual household spending growth rising to as high as 3.0 percent. As the index has overstated growth in recent quarters, spending growth is unlikely be quite that strong, the economist pointed out.
Nonetheless, Capital Economics expects bright prospects for consumer spending in the coming months.
The economist said temporary factors that weighed on household spending in the fourth quarter are set to reverse in the first quarter. Looking further ahead, employment should continue to rise.
“In all, continued healthy spending growth is one reason why we expect the euro-zone’s economic recovery to continue apace this year, with GDP growth of 2.5 percent, Brown concluded.

Source: RTT News

ECB Keeps Guidance Change on the Radar for First Half of 2018

In World Economy News 23/02/2018

European Central Bank officials continued to lay the ground for a shift in policy language in the first half of the year after agreeing in January that it was still too early.
The euro rose then rapidly fell back as an account of the Governing Council’s Jan. 24-25 meeting published Thursday showed some policy makers were ready to remove a pledge to expand the bond-buying program if needed. That argument failed to win the day, with the ECB deciding such a change wasn’t yet warranted and that the wording should evolve gradually in line with progress on inflation.
The currency fluctuations showed how keyed up investors are for any nuance in ECB messaging. With the current round of bond buying due to end in seven months, policy makers at the Frankfurt-based institution are debating what their next step will be and how to communicate it.
What Our Economists Say:
“The minutes reflect the tension between the doves, focused on inflation, and the hawks, who prefer to emphasize the strength of the economy. A shift in favor of the hawks can’t be avoided indefinitely.”

–David Powell and Jamie Murray, Bloomberg Economics
Executive Board member Benoit Coeure said last week that officials are close to starting talks on altering their language.
“March won’t be a big bang in term of changes to forward guidance language — they will probably wait until the last possible moment with adjusting their communication,” said Nick Kounis, an economist at ABN Amro Bank in Amsterdam. “The ECB remains on a slow exit trajectory and it’s not going to win anything with early changes in guidance.”
Officials repeated a remark from their previous meeting that forward guidance could be revisited in the first few months of 2018, while framing this as “part of the regular reassessment at the forthcoming monetary-policy meetings.” Markets were rattled after an account from the ECB’s December session triggered expectations that changes to policy language were imminent.
The euro spiked higher initially after the publication of the latest accounts, before quickly reversing. It was up 0.4 percent at $1.2332 as of 3:41 p.m. Frankfurt time.
As strengthening global growth pushes more central banks to move away from crisis mode, the ECB’s decision surrounds what to do after September. At the January meeting, it confirmed it will keep buying bonds at a 30 billion-euro monthly pace until then, and that interest rates will remain low until well that.
While some policy makers want to start a series of small tweaks in their policy wording at the next meeting on March 8, others prefer to gather more evidence that inflation will pick up, people familiar with the matter have told Bloomberg.
The current guidance links the outlook for QE to progress on bringing inflation sustainably back toward 2 percent. In the future, policy makers could choose instead to emphasize the overall policy stance, which includes negative interest rates, if they wanted to start winding down bond purchases.
“Members widely acknowledged the need for steadiness in communication, which entailed re-emphasizing confidence in the inflation outlook,” according to the January account.

Source: Bloomberg

ECB rejected even token change in policy message at Jan meeting -minutes

In World Economy News 23/02/2018

European Central Bank policymakers meeting last month rejected even a token change in the bank’s policy message, arguing that it was premature to signal policy normalisation given weak inflation, the minutes of the meeting showed on Thursday.
Discussion over tweaking the bank’s stance could still start early this year, concluded the ECB’s Governing Council, which will meet next on March 8. But with inflation still not moving decisively higher they were wary about euro volatility and keen to avoid any disorderly market reaction to a shift in stance.
The minutes suggest that rate-setters are in no hurry to adjust policy, even as markets expect the bank’s unprecedented 2.55 trillion euro asset purchase programme to finally expire this year, more than three years after its launch.
“Changes in communication were generally seen to be premature at this juncture,” policymakers said. “Monetary policy would continue to develop… with a view to avoiding abrupt or disorderly adjustments at a later stage.”
“Some members expressed a preference for dropping the easing bias… However, it was concluded that such an adjustment was premature and not yet justified by the stronger confidence.”
The easing bias, a pledge to ramp up bond buys if needed, is seen as the smallest possible change in the bank’s message –essentially a token adjustment, since few if any investors see bigger purchases ahead.
Removing this easing bias is likely to be the next move in clawing back stimulus, possibly as soon as March, sources close to the discussion told Reuters earlier.
Barclays took a more conservative view, however, expecting the ECB to start adjusting guidance in April. It could first drop the easing bias, followed by tweaks to focus on the future path of interest rates.
It expects the ECB’s asset purchases to end in September, with a first rate hike in December.
EURO
Highlighting a concern over the strong euro, policymakers said attempts by the United States to talk down the dollar appeared to jeopardise a decades-long deal among major economies not to target exchange rates for competitive purposes.
“There was broad agreement among members that the recent volatility in the exchange rate of the euro was a source of uncertainty which required monitoring,” the minutes added.
Policymakers are especially sensitive to the euro’s moves as any big rise in the currency could cut into inflation, threatening to reverse the impact of the stimulus the bank has been providing over the past three years.
“The language pertaining to the monetary policy stance could be revisited early this year as part of the regular assessment at the forthcoming policy meetings,” the ECB said.
“While there was reason to be increasingly confident about the path of inflation, patience and persistence with regard to monetary policy were still warranted.”
The ECB has long flagged a discussion about changes in its communication stance for “early” 2018 but policymakers said they have not yet started that process and it was not yet clear if they would have such a discussion at the next meeting in March.
Markets have calmed since the ECB’s meeting and U.S. officials have also toned down their rhetoric. While the euro is 4.5 percent higher against the dollar than six months ago, it has fallen around 2 percent lower from a recent peak.
Its downward drift to current levels is likely to comfort ECB policymakers who accept some firming is justified by the euro zone’s exceptional economic run.

Source: Reuters (Reporting by Balazs Koranyi; Editing by Catherine Evans)

Japan PM’s adviser says BOJ should consider buying foreign bonds

In World Economy News 23/02/2018

The Bank of Japan should consider buying foreign bonds as part of efforts to reflate the economy during Governor Haruhiko Kuroda’s second term at the central bank helm, an economic adviser to Prime Minister Shinzo Abe said.
The BOJ is prohibited by law from buying foreign bonds for the explicit purpose of influencing currency rates, as exchange rate policy falls under the jurisdiction of the finance ministry.
But some academics have proposed that the BOJ could buy them if doing so was aimed at pump-priming the economy, an idea the central bank has dismissed so far because it would be hard to convince Tokyo’s G20 counterparts that Japan wasn’t trying to weaken the yen.
“Under the BOJ law, the finance ministry holds jurisdiction over currency policy. But I hope Kuroda would consider having the BOJ buy foreign bonds,” Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview on Thursday.
Hamada said while the central bank cannot buy bonds for the sake of affecting exchange rates, it could do so “as a means for delivering proper monetary policy for Japan.”
In the near-term, however, there are limits to what the BOJ can do to prevent sharp yen rises from derailing Japan’s economic recovery, said Hamada, who meets Abe regularly and retains close contacts with Kuroda.
The government last week reappointed Kuroda for another term and chose an advocate of bolder monetary easing as one of his two deputies, a sign policymakers are in no rush to turn off a sweeping stimulus programme.
The announcement did little to reverse the yen’s recent rises against the dollar, which has drawn verbal warnings by Japanese policymakers worried of the pain a strong yen could inflict on an export-reliant economy.
“The yen rose after the announcement of the government’s BOJ nominees,” Hamada said. “There’s a limit to how much monetary easing can keep yen rises in check.”
Hamada, who lives in the United States, conducted the interview over the phone and email exchanges with Reuters.
TOOL OF LAST RESORT
Under its huge asset-buying programme which is intended to help boost inflation to its 2 percent target, the BOJ has been buying government bonds and risky assets such as exchange-traded funds.
But, years after the radical plan was launched, inflation has hardly budged, even as the Japanese economy has seen its longest continuous expansion since the 1980s boom.
Critics say the BOJ’s buying has dried up bond market liquidity and caused distortions in the stock market, leaving the central bank with little ammunition to stave off external shocks to the economy such as the hit from a strong yen.
The buying of foreign bonds by the central bank has been floated as a possible idea by some academics in the past as a way to counter such external shocks.
If the BOJ runs out of domestic assets to buy, it could purchase foreign bonds from financial institutions in exchange for yen cash.
That would give banks more funds which they could loan out to companies and households, whose spending would percolate through the broader economy and spur growth, proponents of the idea say.
But the more direct effect in accelerating inflation would be to raise the cost of imports by weakening the yen.
That means Tokyo may face criticism from its G20 counterparts that it is engaging in currency manipulation, which is why many Japanese policymakers are cautious of the idea.
Still, the BOJ’s dwindling tool-kit may mean the idea will remain an option for central bankers desperate for means to fend off external shocks to the economy, some analysts say.
“The BOJ is already buying various assets, so it won’t be surprising for the idea of buying foreign bonds to emerge,” said Nobuyasu Atago, a former BOJ official and chief economist at Okasan Securities.
“If the economy slides into recession, the BOJ may consider buying foreign bonds given its limited policy options.”

Source: Reuters (Additional reporting by Yoshifumi Takemoto, Writing by Leika Kihara; Editing by Shri Navaratnam and Kim Coghill)

Top US Treasury official slams China’s ‘non-market behavior’

In World Economy News 23/02/2018

The U.S. Treasury’s top diplomat ramped up his criticisms of China’s economic policies on Wednesday, accusing Beijing of “patently non-market behavior” and saying that the United States needed stronger responses to counter it.
David Malpass, Treasury’s undersecretary for international affairs, said at a forum in Washington that China should no longer be “congratulated” by the world for its progress and policies.
“They went to Davos a year ago and said ‘We’re into trade,’ when in reality what they’re doing is perpetuating a system that worked for their benefit but ended up costing jobs in most of the rest of the world,” Malpass said, at the event hosted by the Jack Kemp Foundation.
He said market-oriented, democratic governments were awakening to the challenges posed by China’s economic system, including from its state-owned banks and export credit agencies.
He reiterated his view that China had stopped liberalizing its economy and was actually reversing these trends.
“One of the challenges for the world is that as China has grown and not moved toward market orientation, that means that the misallocation of capital actually increases,” Malpass said.
“They’re choosing investments in non-market ways. That is suppressing world growth,” he added.
China said that its state-owned enterprises operate on free-market principles and is battling within the World Trade Organization’s dispute settlement system to be recognized as a
“market economy” — a designation that would weaken U.S. and EU trade defenses.

Malpass said the Trump administration was “pushing back” against such policies in international forums such as the G20, and was seeking to join “like-minded” countries to press for changes.
But he did not provide any details on the responses that the Trump administration is considering, which include potential trade sanctions against Beijing under a “Section 301” investigation into China’s intellectual property practices and technology transfer requirements for foreign companies.
The administration is also considering steep global tariffs on steel and aluminum, largely aimed at curbing excess production in China, on national security grounds.

Source: CNBC

Friday 9 February 2018

Brexit: Official forecasts suggest economies throughout UK will be hit

In World Economy News 09/02/2018

Parts of the UK that backed a Leave vote would face the heaviest hit as a result of Brexit, according to estimates by government officials.
The forecasts, seen by MPs, model the 15-year impact of the UK staying in the single market, doing a trade deal with the EU or leaving without a deal.
They suggest that in England, the North East and West Midlands would see the biggest slowdown in growth.
The government said the document did not represent its policy.
It added that the forecasts did not “consider the outcome we are seeking in the negotiations”.
And one Eurosceptic Tory MP said the figures were “complete nonsense”.
Following a leak of some of the information to Buzzfeed last week, and political pressure to release it, ministers agreed to allow MPs to see the reports on a confidential basis in the House of Commons library.
In each scenario, growth would be lower, by 2%, 5% and 8% respectively, than currently forecast over a 15-year period.
In north-east England growth would be 3% lower if the UK stayed in the single market, 11% under a trade deal and 16% with no trade deal compared with staying in the EU.
The research suggests London – which backed Remain – would fare the best, with reductions of 1%, 2% and 2.5% in each of the three scenarios.
Scotland’s estimated hit would be 2.5%, 6% and 9%. Wales would see reductions of 1.5%, 5.5% and 9.5%.
Brexit-backing Conservative MP Jacob Rees-Mogg has accused Treasury officials of “fiddling the figures” to make all options but staying in the EU look bad.
Whitehall trade union reacted angrily to this suggestion and government ministers have dismissed his allegation.
Government assessment of Brexit deals on economic growth over 15 years compared to current forecasts
Government regionSingle marketFree tradeNo deal
East Midlands-1.8%-5%-8.5%
Eastern-1.8%-5%-8%
London-1%-2%-3.5%
North-East-3%-11%-16%
North-West-2.5%-8%-12%
South-East-1.5%-4.5%-7.5%
South-West-1%-2%-5%
West Midlands-2.5%-8%-13%
Yorkshire and Humber-1.5%-5%-7%
Northern Ireland-2.5%-8%-12%
Scotland-2.5%-6%-9%
Wales-1.5%-5.5%-9.5%
UK-2%-5%-8%
The government has said the analysis is preliminary and crucially does not measure the impact of the UK’s preferred option of a bespoke and comprehensive trade agreement, covering goods and financial services.
A spokesman said: “As ministers clearly set out in the House, this is provisional internal analysis, part of a broad ongoing programme of analysis, and further work is in progress.
“We are seeking an unprecedented, comprehensive and ambitious economic partnership – one that works for all parts of the UK. We are not expecting a no-deal scenario.”
The research suggests that the option of staying in the single market and customs union, which has been rejected by ministers, would be the least damaging but would still see growth across different parts of the country between 1% and 3% lower than current forecasts.
In the event of a limited free trade deal being negotiated, projected growth would be 8% lower in the West Midlands, north-west England and Northern Ireland, by 6% in Scotland and 5.5% in Wales.
Should the UK leave the EU in March 2019 without any kind of deal, it suggests four parts of the UK would see a double digit slowdown in GDP growth.
As well as north-east England, north-west England and Northern Ireland would see a 12% slowdown, while the West Midlands would see a 13% slowdown.
Other official estimates suggest the UK car industry’s GDP would shrink by 1% if the UK remained in the EU single market but would lose 8% if there was a free trade agreement and 8.5% if the UK left without a deal and went to World Trade Organisation (WTO) rules.
The figures emerged as representatives of Nissan and other Japanese companies are set to meet Theresa May and Chancellor Philip Hammond on Thursday.
Former attorney general and Conservative MP Dominic Grieve said the figures illustrated the risks of leaving the EU without a deal, which he said would hurt the “poorest and vulnerable” in society.
Even if the UK achieved its stated objective of a deep and special partnership with the EU and trade deals with countries like the US, he said it was likely to yield, at best, a very small economic boost.
But Eurosceptic Conservative MP John Redwood said the risks of a no-deal scenario had been overestimated and the Treasury figures were “complete nonsense”.

Source: BBC

May to tell Japanese firms she wants EU deal as soon as possible

In World Economy News 09/02/2018

Theresa May will tell Japanese investors in Britain that she wants a Brexit transition deal as soon as possible, her spokesman told reporters.
The prime minister and Chancellor Philip Hammond are due to meet Japanese companies, including the three big carmakers, later on Thursday.
The plan for a meeting was first raised when Theresa May visited Japan last year.
But it comes amid fresh debate among business over Brexit negotiations.
The prime minister’s spokesman said: “We’ve been clear about the sort of deal that we want to secure and that we want trade which is as frictionless as possible.
“I am sure the PM will be reiterating that when she meets the companies today and also the commitment to securing the implementation period as soon as possible to give them a period of time to adjust.”
Carmakers Nissan, Toyota and Honda were due to attend the talks, along with representatives from banks and drug companies.
Japanese firms have spent billions of pounds in Britain over the past decades, encouraged to set up in the country by successive governments promising a business-friendly base from which to trade across the continent.
Nissan, Toyota and Honda began their UK operations in Britain in the 1980s and now build nearly half of all of Britain’s 1.67 million cars. The big majority of these are exported.
The motor industry has expressed concern that their exports could face tariffs of up to 10% and be subject to customs delays after Britain leaves the European Union.
Japanese drug companies have also made Britain their European base. Some are concerned about future drug regulations, with any divergence with the EU likely to pose regulatory challenges.
London is also home to Japanese banks, such as Nomura, Daiwa Securities and Sumitomo Mitsui Financial. Like other foreign banks, they are keen to know about trading and so-called “passporting” arrangements for access to the EU.
In 2016 Nissan chief executive Carlos Ghosn met prime minister Theresa May amid fears over the future of its production plant in Sunderland.
Nissan sought assurances over post-Brexit arrangements ahead of future investment in the Sunderland plant, Britain’s biggest car factory.

Source: BBC

Bank of England hints at earlier and faster rate rises

In World Economy News 09/02/2018

The Bank of England has indicated that the pace of interest rate increases could accelerate if the economy remains on its current track.
Bank policymakers voted unanimously to keep interest rates on hold at 0.5% at their latest meeting.
However, they said rates would need to rise “earlier” and by a “somewhat greater extent” than they thought at their last review in November.
Economists think the next rate rise could come as soon as May.
The value of the pound initially jumped almost 1% against the dollar, but fell back to about 0.5%.
Higher interest rates have an important effect on households and the economy.
Around 8.1 million UK households have a mortgage, and of those almost half are on either a standard variable rate or a tracker rate.
Interest rates on those types of mortgages would be likely to match any increase in official rates made by the Bank of England.
But for savers a move higher by the Bank of England could be a bonus, as High Street banks generally have to raise their rates of interest.
In November, the Bank raised the cost of borrowing for the first time in more than 10 years – from 0.25% to 0.5%.
Its forecasts at the time indicated there could be two more increases of 0.25% over three years.
But it now appears there could be a third increase and those rises could be sooner than expected.
“The Committee judges that… monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report,” minutes from the Monetary Policy Committee’s (MPC) meeting said.
The Bank noted that the global economy was expanding at the fastest pace in seven years and that the UK was benefiting from that growth.
It also thinks that UK wage growth will start to pick-up, giving the economy a further boost.
As a result, the Bank has raised its growth forecast for the UK economy to 1.7% this year, from its previous forecast of 1.5% made in November.
But it says its forecasts are based on a “smooth” adjustment to Britain’s departure from the European Union.
Today the Bank signalled that the old conventions of increasing interest rates when inflation is above target would return.
The cost of mortgages is likely to rise and savers at last will see returns improve.
The economy is stronger, the Bank has made clear today.
But not everything in the garden is rosy.
It points out that the UK economic engine still “remains restrained by Brexit-related uncertainty” which is “the most significant influence on the economic outlook”.
We are driving along with the hand brake half on.
Growth is modest by historic standards and the UK has gone from the fastest growing economy among the G7 largest global economies to the slowest.
Rate rise timing
Economists think it is likely that the next rate rise will come in May, but are not certain.

“All told the MPC has signalled to markets that a May rate hike is under active consideration, but is far from guaranteed… we still think that the MPC will hold back until August,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Paul Hollingsworth, senior UK economist at Capital Economics said: “Today’s releases pave the way for an interest rate hike in May, and we think that the MPC will hike a further two times this year, taking Bank Rate to 1.25%.”

Official figures last month showed that the economy grew 0.5% in the last three months of 2017, which was faster than economists had been expecting.

Unemployment remains low at 4.3% and inflation edged lower in December to 3%.
The Bank also released the letter sent by governor Mark Carney to the Chancellor of the Exchequer, Philip Hammond, to explain why inflation had breached the target rate of 3% in November.
In the letter, Mr Carney said that higher inflation was “almost entirely” due to the effects of a rise in the prices of imports, caused by the fall in the pound’s value after Britain voted to leave the European Union.
The chancellor replied by stressing the importance of boosting UK productivity and the government’s efforts to make that happen.
Source: BBC

Bundesbank’s Dombret tells banks a Brexit EU access deal unlikely

In World Economy News 09/02/2018

London’s blueprint for easy access to European Union financial markets after Brexit may not be feasible and banks should apply for EU licences or be left “high and dry”, a Bundesbank board member said.
Andreas Dombret said he doubted that a proposal by the City of London, Britain’s financial district, for “mutual recognition” or broad acceptance by Britain and the EU of each other’s financial rules, is actually possible.
Such a move would undermine national sovereignty by giving substantial powers to technical committees of supervisors to make it work, Dombret told an event at UK Finance, Britain’s domestic banking industry body.
“The substantial effort necessary … may outweigh the benefits to society,” Dombret said, adding that free trade in financial services was becoming less and less likely and it was time to face facts.
Financial industry representatives told Reuters last week that European Commission officials have said that the mutual recognition proposal will not fly as it confers the benefits of single market membership on a non-EU country.
Other UK financial industry officials have said there is interest among EU states in mutual recognition, and Britain’s Financial Conduct Authority said on Monday it is a familiar concept for the bloc.
But Britain’s government has yet to detail what it wants for financial services in trade negotiations with the bloc.
Nicky Morgan, chair of the British parliament’s Treasury Select Committee, called on Thursday for City minister John Glen to publish the government’s position paper to “provide some much needed clarity” for banks to help with their Brexit preparations.
UK Finance Chief Executive Stephen Jones said it’s “entirely possible” to construct a new trade deal with the bloc that preserves benefits of close alignment without sacrificing political and regulatory autonomy.
Without a bespoke trade deal, Britain faces having to continue copying EU rules like Norway and Switzerland for financial market access.
NO SAFETY NET
Dombret also gave a blunt warning to banks about relying on a transition period to delay hard decisions on licences and staff moves to new EU hubs.
Even if the EU and Britain agree on a transition deal by March to bridge Brexit and new trading terms, it may not give the legal certainty that cross-border banks crave, Dombret said.
The sector would still have to wait until October to see if there is agreement on future trading relations as well.
“The transition phase is not a safety net,” Dombret said.
It might be better to focus on making licensing procedures as smooth as possible given that a “no deal” on future financial services trade is a realistic outcome, he said.
European regulators are looking at more than 100 financial firms operating from Britain that potentially need a new or modified EU licence, he said.
The European Central Bank’s banking supervisor said on Wednesday that eight banks have taken formal steps to apply for a licence, with four others planning to extend operations in the euro area.
“Those who do not complete their plans and start implementing them by March this year risk being left high and dry by Brexit one year later,” Dombret said, adding the advice also applies to European banks with branches in Britain yet to make licence applications to the Bank of England.
The BoE proposed in December that EU banks in Britain continue operating as branches without a costly conversion into subsidiaries if there is similar cooperation with EU regulators after Brexit.
Dombret said such an approach, reciprocated already by the ECB’s pragmatic policy stances on licensing, can be an important contribution towards a smooth transition.

Source: Reuters (Reporting by Huw Jones; editing by Alexander Smith and Adrian Croft)