Money talks… 

July 16, 2018

Following on from his insightful commentary on the economy in last year’s Money Issue, Andrew Hebden – the Bank of England’s Deputy Agent for the North East – returns to reflect on the Governor Mark Carney’s recent trip to the region, and how the UK economy is fairing compared to 12 months ago

In last year’s North East Times’ Money Issue, I wrote a piece explaining the role of the Bank of England’s Agencies. I described the network – including our North East Agency, based in Newcastle – as the ‘eyes and ears’ of the Bank around the country.

Our job, I said, is to meet with decision-makers in businesses and the third sector to better understand what is happening on the ground in companies and communities all over the UK.

And we continue to host visits from senior policymakers to the regions so that they can hear this evidence for themselves.

For example, on July 5, Governor Mark Carney joined us to deliver a keynote speech at the Great Exhibition of the North’s Northern Powerhouse Business Summit, and took part in several other meetings with our contacts in Newcastle.

A few days later, we hosted a visit from our Chief Economist, Andy Haldane, who met with representatives from a number of companies around County Durham and with third sector contacts on Tyneside.

The focus of these conversations was the Bank’s responsibilities for monetary policy – we need to understand what is happening in the economy to assess the outlook for growth, employment and inflation.

But the Bank’s responsibilities extend well beyond trying to hit the 2 per cent inflation target we are set by Government.

It is another of our key functions to scan the horizon for possible risks to the financial system which could have implications for consumers, households and business. If that risk builds too much, then our job is to take action where necessary.

That responsibility sits specifically with the Bank’s Financial Policy Committee (FPC), whose main role is to ensure the robustness of the financial system.

That means that, whatever shocks head its way, the financial system should still be able to provide a service to households and businesses in the North East.

In essence, our job is to ensure that we don’t have a repeat of the damaging financial crisis that rocked this region and beyond a decade ago.

Twice a year, the Bank publishes the FPC’s assessment of the risks that the UK currently faces.

And its latest report covers a wide range of possible sources of instability, from capital to credit to cyber.

Importantly, considering the UK is one of the most financially open economies in the world, the report also looks beyond these shores for those risks.

Its latest assessment focuses on the risks associated with recent political developments in Italy and the potential impact on other European economies.

The report also looks at what is going on in China, where debt levels remain elevated, and it considers the implications of the recent intensification of global trade tensions, a theme which the Governor drew on for his speech in Newcastle.

Overall, the FPC judges that global vulnerabilities remain material and have increased. In contrast, aside from those related to Brexit, the FPC judges that domestic risks remain at a ‘standard’ level.

Last year, the Bank ran a stress test of the UK’s banking system. The results of our biggest institutions showed that they are now resilient to severe domestic, global and market shocks.

As the Governor made clear in his answer to a question following his speech in Newcastle, that means that the financial systems are in a much better place than was the case a decade ago.

In addition, it is important to note that levels of household and corporate debt remain materially below their 2008 levels. And overall credit growth remains broadly in line with the rate of growth of the economy.

The cost of servicing debts also remains low thanks to the current low level of interest rates.

There is, however, no room for complacency.

In recent months, the cost of borrowing for some companies and households has edged up a little. And consumer credit continues to expand rapidly.

The FPC highlighted this as a risk in its assessment at the back end of last year, when it acted to ensure that lenders are able to absorb severe losses on this type of lending.

As for the housing market, banks’ risk appetite has increased over the past few years. But weak demand – reflected in low levels of transactions – has kept mortgage credit growth modest.

In addition, the FPC’s earlier mortgage market measures, including limiting the number of loans that lenders can extend at high loan-to-income ratios, have insured against a marked deterioration in lending standards.

Of course, when identifying financial stability risks, the UK’s pending departure from the European Union looms large.

The Bank of England is acting in three principal ways to reduce the impact of these risks on UK households and businesses.

First, we are ensuring that the UK banking system could continue to lend to UK households and businesses even in the event of a disorderly, cliff-edge Brexit, however unlikely that may be.

Second, the FPC has identified the most important risks from a cliff-edge Brexit to the provision of financial services, and it has outlined the necessary steps to address them. Its latest assessment is that progress has been made but material risks remain.

Third, the FPC has made clear that, irrespective of the particular form of the UK’s future relationship with the EU, it remains committed to the implementation of a robust regulatory regime in the UK.

Even so, the report points out that avoiding the risks of a cliff-edge Brexit also relies on the efforts of EU authorities.

Elsewhere, the FPC has announced new measures to deal with cyber risks to financial services, ensuring if firms are hit by them, they get back on their feet quickly in a way which doesn’t cause financial stability concerns.

Whether they originate close to home or far away, the Bank of England remains vigilant to the most important risks to financial stability.

As the Governor made clear in his Newcastle speech, our absolute objective is to ensure that the financial system continues to provide a service to households and businesses here in the North East and across the rest of the UK in good times and bad.

Bank of England

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