The Daily Update - Monetary policy silver linings

Today’s Bank of England (BoE) Financial Stability Report demonstrates a few silver linings amongst the “significant near-term domestic risks to financial stability… [that] risks have begun to crystallise”.

Take heart, not all is woe and stagnation amongst the miscellany of British people and its economy. Tonight Wales face Portugal with a respectable chance to reach the Euro 2016 finals, a Scotsman Andy Murray also looks likely to reach the Wimbledon Men’s semi-finals, the FTSE 100 is undergoing a bounce, advertising companies across London have received a surge of business from French and German clients, and legal and trade experts are being hired a-plenty.

All of these are however bittersweet. England’s sporting ability has again been outshone by its smaller peripheral principalities, the FTSE rally seems mostly driven by the continuing decline of the pound, the surge in London advertisements is courtesy of EU vultures enticing British banks to relocate to Paris and start-ups to move to Berlin and the government’s scurry to hire legal and trade experts stems from their complete lack of prior preparation and understanding over the way forward in EU and trade negotiations.

Also bittersweet is the real-life stress test that followed the Brexit referendum which, although unpleasant, showed that recent measures invoked by the BoE helped avert a more pronounced crisis. Today’s Financial Stability Report from the BoE and accompanying press conference demonstrated how regulatory changes since the Global Financial Crisis seem to have helped financial markets function “pretty well” through the ongoing Brexit volatility. In his statement BoE Governor Mark Carney reminded markets that, “major UK banks have raised more than £130 billion of capital since the crisis and their aggregate Tier 1 capital now amounts to 13.5% of risk-weighted assets… all our major banks and building societies passed last year’s stress test which included losses twice those incurred during the global financial crisis… major UK banks now hold more than £600 billion of high quality liquid assets, or around four times the amount before the financial crisis”.

Other silver linings include the sharp reduction in Gilt yields which help reduce the public deficit and has given legitimacy for the Treasury Department to tear up previous debt targets and allowing the Government flexibility to borrow further at record low yields. Also, given the average British household’s historical propensity to live beyond their means, the sharp decline in sterling, “has moved in the direction that is necessary to facilitate some of the economic adjustments that are going to be required in the economy”.

The most notable “risks have begun to crystallise” include: “the historically large current account deficit could be vulnerable to sudden shifts in foreign capital”, “adjustments in commercial real estate could tighten credit conditions for UK businesses” and “the number of vulnerable households could increase”. That is why along with the report came announcements that the BoE will also introduce further measures to aid continued financial stability. Monetary policy and currency adjustments seem to have helped the UK weather the storm but cannot steer the economy. The government still has to navigate the British economy out of this turbulence - it seems, without a map and still without a captain. In such a drawn-out storm let’s hope that there are sufficient (monetary policy) provisions to see us through and that the ultimate destination is worth the journey.

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