The Bank of England (BoE) is expecting that
some “monetary policy easing will likely be required over the summer” as the
“economic outlook has deteriorated” on the back of the UK voting to leave the
EU, the BoE governor Mark Carney said in a speech today at the Bank.
In addition, “in order to support market
functioning, the Bank of England continues to stand ready to provide more than
$250 billion of additional funds through its normal facilities”.
The combination of falling sterling,
increased uncertainty, tighter financial conditions and expected slower supply
growth and capital accumulation are all factors that are going to affect demand,
supply and exchange rate, leading to “a materially lower path for growth and a
notably higher path for inflation” than what previously set out in the BoE may Inflation Report, Carney said.
The BoE’s Monetary Policy Committee will on
July 14 make an “initial assessment” of the measures to take in terms of
monetary policy, as it will face a “trade-off between stabilising inflation on
the one hand and avoiding undue volatility in output and employment on the
other”, Carney said.
In terms of financial policy, Carney said
BoE will “continue to offer indexed long-term repo operations on a weekly basis
until end-September 2016”. That “will provide additional flexibility in the
Bank’s provision of liquidity insurance over the coming months”, he said.
Meanwhile, on the back of contingency plans
put in place by the BoE, UK banks have raised over $130 billion of capital
ahead of the vote and now have “more than $600 billion of high quality liquid
Speaking of the climate of increased
uncertainty, he said policymakers’ main objectives should be to conduct an
assessment of risks, to develop and communicate a plan to address them and to minimise
any possible damage arising from confusion around objectives and targets.
The plan, Carney said, “would include a
comprehensive strategy for engaging with the EU and the rest of the world,
including clarifying the UK’s future trading arrangements, calibrating its
openness to migration, ensuring the continuity of capital flows, and confirming
the appropriate regulatory framework for the UK financial system”.
Speaking of growth targets, he said the
BoE’s Monetary Policy Committee had estimated growth to slow domestically to 2%
in 2016, with increased economic uncertainty linked to the EU referendum
lowering the UK’s GDP by around 0.7% after a year.
However, “while material, this was less than
suggested by past relationships partly because our projections were
conditioned, by convention, on a vote to remain in the EU”, Carney said.
Therefore, “the material slowing in growth
that the MPC had identified as a risk associated with the referendum now looks
likely to be our central forecast”, he said, adding that BoE will estimate in
the coming weeks the impact of the deceleration.