Mark Carney denied that the Bank of England undermined its
independence in the run-up to the U.K.’s referendum on its European
Union membership by highlighting the risks of a decision to leave.
“It’s
extraordinary, in all senses of the word,” the BoE governor responded
on Tuesday when asked by U.K. lawmakers about the charge that he shaped
the views of financial-stability officials. “That’s not the way the
committee works. The chair doesn’t guide conclusions.”
Before the June 23
vote, the BoE warned repeatedly that a decision to leave the EU would
create uncertainty that could weaken the pound, deter investment and
lead to a recession. Those comments were condemned at the time by
supporters of the “Leave” campaign, though Carney has since pointed out
that the risks identified have started to manifest.
Sterling is
trading around $1.31, near a 31-year low and down from $1.50 just before
it became clear that the “Leave” campaign had won. By July 7, a total
of seven property funds with about 18 billion pounds ($24 billion) of
assets had frozen withdrawals as investors sought redemptions amid
concerns that international companies might scale back or shut London
operations, reducing the value of property.
Carney
declined to be drawn on the likelihood of monetary action, citing the
BoE’s quiet period before the next decision on Thursday. While the
nine-member Monetary Policy Committee won’t have substantial data on the
economic fallout from Brexit, officials may choose to act
pre-emptively. Thirty of 54 economists surveyed by Bloomberg predict the
benchmark interest rate will be lowered on July 14, with a majority of
those seeing a 25 basis-point reduction to 0.25 percent.
No Pressure
Testifying
alongside the governor in Parliament, external Financial Policy
Commitee members Richard Sharp and Donald Kohn said they weren’t
pressured to form certain views. Asked by Treasury Committee chairman
Andrew Tyrie whether the BOE was guilty of “startling dishonesty,” Sharp
replied “absolutely not” -- a position Carney backed.
“What’s in
the record, and the FSR, are the views of the FPC,” the governor said.
“They’re not pre-judged or pre-decided. They’re based on robust evidence
and discussion.”
Carney said he did talk with U.K. Chancellor of the
Exchequer George Osborne about the risks surrounding Brexit, and that
he’s prepared to look at ways of sharing details of those discussions
with lawmakers if it was in the public interest.
“I’d be wary of
establishing a precedent that limited free-flowing discussion between
future governors, future chancellors,” he told Tyrie. “We can create a
process which relies on the discretion of you as chair so that we are
not putting things in the public domain that could be immediately
sensitive.”
Political Leadership
Carney’s comments come after the publication of the record
of meetings of financial-stability officials held in the wake of the
vote. The FPC discussed the risk that cutting the countercyclical
capital buffer imposed on banks, freeing them to lend more, may instead
prompt the institutions to reward investors. The record reiterated a
readiness to take further measures if warranted.
The political
uncertainty in the U.K. may ease now that Home Secretary Theresa May is
on track to succeed David Cameron as prime minister on Wednesday. Her
only rival pulled out of the Conservative Party leadership contest,
speeding up the process by two months. May worked at the BOE from
1977-83 in the economics area in the central bank’s
financial-institutions and monetary-policy groups.
Still, the
questions about Britain’s future trade status with Europe and the rest
of the world may take months or years to settle and could hamper
investment and hiring decisions, Carney said.
“The
financial-stability risks have been more immediate,” he told lawmakers.
“Longer term, the underlying performance of the economy is one of the
key determinants of financial stability and the decisions that
Parliament will take in coming years will be hugely important in
determining that trajectory.”
While the uncertainty may mean there
is less foreign direct investment in Britain than there would otherwise
have been, the British economy should continue to grow in the longer
term and the decline in the pound will make sterling assets more
attractive to overseas investors, Carney said. “We’re seeing increases,
but not sharp increases in risk premia in the U.K.”
The
pound’s drop could also help narrow the current-account deficit. If
sterling stays at present levels, the gap could shrink by about a third,
he said. The BOE has warned the shortfall, large historically and
compared with other nations, is a source of vulnerability.
Liquidity Operations
BoE
financial-stability officials also published a redacted portion of text
from their March meeting, which shows they received briefings on the
central bank’s contingency plans, which included “managing funding and
liquidity risks in sterling and foreign currency.”
Carney has
increased the number of the BoE’s liquidity operations since the vote to
leave the EU. At an auction of funds in exchange for collateral on
Tuesday, banks were allotted 2.01 billion pounds, compared with 3.1
billion pounds at an operation in the days following the vote and 1.35
billion pounds last week.
The governor said the BoE’s comments and
actions before and since the referendum, with multiple public
appearances, show the institution has become far more open about its
intentions. He hit back at lawmaker Jacob Rees-Mogg, a Brexit supporter
who is one of his most prominent critics, who said there had been a
“lack of appearance of impartiality” by the BoE.
“The BoE and the
Financial Policy Committee are well aware of their statutory
responsibilities,” Carney said. “I think those who cast it into question
should consider their motivations and their judgment."
http://www.bloomberg.com/news/articles/2016-07-12/boe-discussed-risks-of-lowering-banks-buffers-post-brexit
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