Bank of England says Brexit 'risks have begun to crystallise' and sets out lending plans

It has reduced capital buffers by £5.7bn, effectively allowing banks to lend £150bn more to households and businesses

Hazel Sheffield
Tuesday 05 July 2016 12:13
Carney: We have a clear plan

The Bank of England has set out measures to fight recession in the aftermath of Brexit, saying that the financial stability of the UK has already been affected by the vote.

“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging,” it said in a twice-yearly report on financial stability.

As part of the measures planned to fight off a downturn, the Bank has reduced capital buffers by £5.7 billion, effectively allowing banks to lend £150 billion more to households and businesses.

Carney said this measure and the "hard work of the last seven or eight years" means that people should be able to take out a mortgage or borrow money if they need it.

Asked if it was a good time for people to borrow money, he said:

"We always advise people to be prudent especially if you’re taking out a mortgage," he said.

"You want to be able to ensure that you can service that mortgage even if times are tough, so thinking about where interest rates will go, where wages will go in the lifetime of that mortgage. But the system should be there if you want to take out a mortgage because of the hard work of the last seven or eight years to make sure there is money to borrow if you need it," he said.

Ben Brettell, senior economist from Hargreaves Lansdown, said: "It should be remembered that lending volumes depend on demand as well as supply – if already indebted households become more risk averse following the referendum, the demand for credit simply won’t be there, however much the banks are willing to lend."

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The FTSE 100, which made losses in the morning, was up 0.5 per cent after Carney's announcement at 6,525.38.

In a question and answer session following the launch, Carney said that markets were performing "pretty well" since June 23.

But he said there were signs that people were pulling out of investments and becoming less keen to take risks, which is why the bank is easing up on the lending rules, to get the economy moving again.

He said that the two-day fall in sterling was the sharpest in half a century, but that the lower value of the pound was "necessary" for other adjustments in the economy.

"The adjustment in sterling has been significant and was sharp initially.

"That adjustment has moved in the direction that is necessary to facilitate some of the economic adjustments that are needed in the economy," he said.

When asked whether the markets were showing that a recovery was underway, he said:

"I would focus on the domestic stocks in the FTSE 250. There’s been a much more significant movement in those stocks. The movements in financial asset prices related to banks has been quite telling."

The FTSE 250, or the 250 biggest companies in the UK, is more dependent on the UK economy than the multinational companies represented in the FTSE 100.

The FTSE 250 fell 13 per cent in two days after the vote came in. It has recovered a little since then, but not on the scale of the FTSE 100.

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