Problems with property market, sterling and company performance ‘may be starting to manifest’
Mark Carney The Bank of England Governor has warned the Lords Committee fears over Brexit are already hitting the economy and the situation could get worse. He stated the ballot on June 23 as ‘the most significant near-term domestic risks to financial stability’.
‘Some elements of these risks may be beginning to manifest,’ Mr Carney went on. ‘Since November, the trade-weighted value of sterling has fallen 10 per cent, with more than half of that occurring since the Monetary Policy Committee’s last forecast in February.
‘The cost of buying protection against a marked depreciation of sterling has risen notably, with sterling risk reversals falling to their lowest level in over a decade.
‘UK short-term interest rates have fallen by around 60 basis points (0.6 per cent) since November. The equity prices of UK-focused firms have under-performed by around 10 per cent those with a more global orientation since the middle of February.’
Mr Carney said the Bank’s ‘indicator of uncertainty’ had increased, warning that the change in the past had been ‘associated with a marked reduction of the rate of GDP growth’.
‘Commercial real estate transactions have fallen by around 40% in the first quarter across the country and by around 60% in London,’ he went on.
‘Such developments reflect a growing uncertainty about the UK’s macroeconomic outlook.’
Mr Carney said there was likely to be ‘some softening in growth during the first half of 2016’, but stressed the Bank would react more ‘cautiously’ than usual due to the effects of the referendum.
The governor also speculated that post-Brexit there would be an ‘extended period of uncertainty’.
‘A vote to leave the EU might result in an extended period of uncertainty about the economic outlook, including about the prospects for export growth,’ he said. ‘This uncertainty would be likely to push down on demand in the short run.’
Mr Carney added Britain’s deficit could become more expensive if Britain backs Brexit as borrowing would likely cost more.
He said: ‘These are balances of probability, but the likelihood is that it will become more expensive to fund that deficit and, with a shift in the structure of it, it may mean that for a period the UK economy cannot run as large a current account deficit, which means – it means that there would be less activity in the economy, less growth.’