The House of Lords Economic Affairs Committee today took evidence
on a wide range of subjects from Mark Carney, Governor of the Bank
of England.
Committee chairman started the session by
asking about the Governor’s speech on February 12 on the global
outlook, when he said Brexit had the potential to boost the UK
economy. Mr Carney expanded on the tensions that had an effect on
the economy, both domestic and global. In an international
context, he thought the UK could be a rule-setter rather than a
rule-taker, with constraints.
Replying to regarding the
risk of a no-deal Brexit, Mr Carney said there were certain
scenarios - not forecasts - which the Bank had examined in
November to test the system to ensure financial institutions were
prepared. They could be summarised as disruptive and disorderly
scenarios. Since November there had been some constructive
developments in terms of preparedness but there was still likely
to be an “economic shock” if there was a no-deal Brexit. The
Bank’s task was to try to ensure financial stability, which would
help, but it could not do anything about market or economic
stability. The system would work but there would be a material
adjustment.
asked for details of
scenarios which were neither disruptive nor disorderly. Dr Carney
said the Bank had looked at the possibility of a smooth
transition to WTO rules, in which case there would likely be a
reduction in GDP of between 2.5 and 5% over three years, compared
with just under 5% in a disruptive scenario and 8% in a
disorderly scenario.
asked for an explanation
of the reduced pace of interest rate rises as suggested in the
Bank’s February inflation report. The Governor said two things
had happened since the November report: the global economy had
slowed materially, and the UK economy had slowed down. Regarding
corporate debt, he said the UK banking sector fell in the
“top-right corner” - the least risky with the smallest exposure.
But there had still been a heightened focus on underwriting
standards in the UK.
requested an
explanation of why the economy had slowed while there were
increased tax receipts and higher employment. Dr Carney said the
labour market had outperformed the economy for a variety of
reasons, including benefit changes. The quality of jobs and wages
had also improved. He thought there were two factors in play:
companies had decided it was better to hire than to build in
order to expand, and employment in general was a lagging
indicator of economic performance.
asked if there was a
possibility that capital restrictions would have to be relaxed
post-Brexit. Dr Carney replied that if there were a material
shock, the system would need to be in a position not just to
survive it, but to continue to meet credit demand. He felt the
level of capital was about right at the moment.
also asked about clearing
houses for derivatives in euros. Dr Carney said that, in terms of
the supervisor relationship, there had to be a cooperative
relationship. Ultimately, the home authority had to have the
final word.
asked about
globalisation generally and Lord Turbull specifically asked about
“stranded assets” in relation to fossil fuels. Why was an
investment in an oil refinery any different to other stranded
assets, such as railways, unoccupied housing estates, etc? It was
a judgement call, said Dr Carney.
asked about RPI and the
suggestion to resuscitate it to measure inflation. Dr Carney said
it was highly desirable to have a single measure of consumer
prices, but the transition was difficult. The Bank had a
preference for CPI and thought the development of CPIH was
promising. On the question of housing, CPIH was “tracking well”
but a bit more study was required. One big issue was if the
government should issue CPI-linked debt. There was natural demand
for the product.
asked about
the 5.5% stake in Barclays taken by Edward Bramson with a loan
from Bank of America. In terms of the large exposure limit, Dr
Carney did not want to pre-judge. She also asked about the tax
modelling consequences of IRS15 - revenue recognition in
contracts. Dr Carney said he would write to the committee on the
subject.
Replying to , he said there was an
element of Brexit uncertainty which dictated a reluctance in
commercial infrastructure. With the resolution of the
uncertainty, he expected repricing of assets.
Lord Kerr asked if scenarios would be changed if there was a
delayed Brexit. Dr Carney said one of the biggest challenges was
business preparedness. There was a big difference between
transition and heightened uncertainty.
The full transcript of the proceedings will be sent as soon
as possible.
