Monetary policy and financial stability update

Raakhi Odedra

20 October 2016 Off the record

Agency for Yorkshire & the Humber 2 - “This is not (underlined, italicised, capitalised and repeated in bold) a re-run of the of 2008/09.” - , Chief Economist, 15 July 2016

- “The UK can handle change… The question is not whether the UK will adjust but rather how quickly and how well.” - , Governor, 30 June 2016

Agency for Yorkshire & the Humber 3 The Bank of England’s Agencies

Yorkshire & Humber

• Northallerton • Scarborough

• Harrogate • Skipton • York

• • Bradford • Hull • Scunthorpe • Grimsby • Doncaster • Sheffield

Agency for Yorkshire & the Humber 4 What I will cover

1. MPC and FPC policy actions 2. Prospects for growth and inflation 3. Financial Stability – Risks and Resilience

Agency for Yorkshire & the Humber 5 The Monetary Policy Committee

Last meeting: 14th Sept 2016 Next meeting: 2nd Nov 2016

Mark Carney Sir Minouche Shafik Andy Haldane

Kristin Forbes Jan Vlieghe Ian McCafferty

Agency for Yorkshire & the Humber 6 Monetary Policy Committee

1. Bank Rate: cut from 0.5% to 0.25% 2. ‘Term Funding Scheme’ to maximise pass-through 3. Government bond purchases of £60bn (‘QE’) 4. Corporate bond purchases of £10bn (‘QE’)

Agency for Yorkshire & the Humber 7 Policy actions

1. Bank Rate: cut from 0.5% to 0.25% 2. ‘Term Funding Scheme’ to maximise pass-through 3. Corporate bond purchases of £10bn (‘QE’) 4. Government bond purchases of £60bn (‘QE’)

Agency for Yorkshire & the Humber 8 Bank Rate since 1694

Agency for Yorkshire & the Humber Variable vs fixed rate loans

Proportion of stock of UK loans at variable and fixed rates

Agency for Yorkshire & the Humber Policy actions

1. Bank Rate: cut from 0.5% to 0.25% 2. ‘Term Funding Scheme’ to maximise pass-through 3. Corporate bond purchases of £10bn (‘QE’) 4. Government bond purchases of £60bn (‘QE’)

Agency for Yorkshire & the Humber 11 Term Funding Scheme: what is it?

- Designed to reinforce pass-through of cut(s) to Bank Rate - Banks & building societies can borrow from the BoE at Bank Rate (now 0.25%) if they maintain or expand lending - They can borrow 5% or more of value of current stock of loans

Agency for Yorkshire & the Humber 12 Policy actions

1. Bank Rate: cut from 0.5% to 0.25% 2. ‘Term Funding Scheme’ to maximise pass-through 3. Government bond purchases of £60bn (‘QE’)

Agency for Yorkshire & the Humber 13 QE increased from £375bn to £435bn

£bn

Agency for Yorkshire & the Humber Policy actions

1. Bank Rate: cut from 0.5% to 0.25% 2. ‘Term Funding Scheme’ to maximise pass-through 3. Government bond purchases of £60bn (‘QE’) 4. Corporate bond purchases of £10bn (‘QE’)

Agency for Yorkshire & the Humber 15 Prospects for growth and inflation

Agency for Yorkshire & the Humber 16 Volatile activity surveys

Markit/CIPS indicators of current output growth

Services

Manufacturing

Agency for Yorkshire & the Humber 17 Consumer confidence dipped, then rebounded GfK measure of consumer confidence

Agency for Yorkshire & the Humber 18 Surveys suggest business caution Deloitte CFO survey, Q3 2016

Agency for Yorkshire & the Humber 19 Forecasts

Agency for Yorkshire & the Humber 20 Output growth to slow, then pick up

Agency for Yorkshire & the Humber 21 Inflation to rise in 2016/17

Agency for Yorkshire & the Humber 22 Forward interest rates are very low

Agency for Yorkshire & the Humber 23 The Financial Policy Committee

DG-FS DG-PR Governor (Chair) DG-MA ED - FSSR Sir Jon Cunliffe Andrew Bailey Mark Carney Ben Broadbent Alex Brazier

External External External External Acting CEO-FCA Clara Furse Don Kohn Richard Sharp Martin Taylor Tracey McDermott

Last meeting: 20th Sept 2016 Next meeting: 23rd Nov 2016

Agency for Yorkshire & the Humber Financial Policy Committee

1. Countercyclical capital buffer relaxed 2. reserves to be excluded from leverage ratio 3. Indexed long-term repo operations continuing 4. Transition to Solvency II for insurers smoothed

Agency for Yorkshire & the Humber 25 Measures of uncertainty have increased

Agency for Yorkshire & the Humber The pound has adjusted sharply

Agency for Yorkshire & the Humber 27 Risks: UK current account deficit

Agency for Yorkshire & the Humber 28 Risks: Household debt-to-income ratio

Agency for Yorkshire & the Humber Sources: ONS and Bank calculations. Risks: Commercial real estate market

Agency for Yorkshire & the Humber Sources: The Property Archive and Bank calculations. Global risks: Private sector debt levels

Agency for Yorkshire & the Humber Source: BIS total credit statistics. But… financial institutions more resilient

Agency for Yorkshire & the Humber Sources: PRA regulatory returns, published accounts and Bank calculations. Financial Policy Committee - stress tests At end of each test we confirmed UK banking system had capacity to maintain lending to real economy:

2014 test 2015 test • Slowing in capital flows • EME severe downturn • ERI -30% • Bank rate to zero • CRE -30%, Residential -35% • Squeeze on net interest • Bank Rate +3.75% margin • Unemployment +4.5% • Impact 2x financial crisis

Agency for Yorkshire & the Humber Summary

• Increased financial market volatility, reflecting economic policy uncertainty.

• Financial stability risks include: • Current account deficit • Commercial property markets • Household debt

• Overall, bank funding costs still low. Capital buffers loosened to boost lending conditions.

Agency for Yorkshire & the Humber Sources: Bank of America Merrill Lynch Global Research, Bloomberg, Thomson Reuters Datastream and Bank calculations. Any views or questions?

www.bankofengland.co.uk [email protected]

Agency for Yorkshire & the Humber 35 Chart 1.1 Swap rates at different maturities(a)

Agency for Yorkshire & the Humber Source: Bloomberg. Chart 1.2 Indicative long-term funding spreads(a)

Agency for Yorkshire & the Humber Sources: Bloomberg, Markit Group Limited and Bank calculations. Chart 3.1 Deloitte CFO Survey: cost and availability of credit(a)

Agency for Yorkshire & the Humber Chart 3.2 Sterling-denominated corporate bond Spreads (a)

Agency for Yorkshire & the Humber Source: Bank of America Merrill Lynch Global Research. Agency for Yorkshire & the Humber Sterling in past depreciations

t = 0 = 100 ERM exit Lehman Brothers 110 EU Referendum 105

100

95

90

85

80 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 Weeks from event

Agency for Yorkshire & the Humber Term Funding Scheme: what is it?

- Designed to reinforce pass- through of cut(s) to Bank Rate - Banks & building societies can borrow from the BoE at Bank Rate (now 0.25%) if they maintain or expand lending - They can borrow 5% or more of value of current stock of loans

Agency for Yorkshire & the Humber 42 Share prices fell, then recovered

Agency for Yorkshire & the Humber 43 And finally…

13 September 2016 www.thenewfiver.co.uk

Agency for Yorkshire & the Humber Q2 growth was reasonably strong…

Agency for Yorkshire & the Humber 45 Unemployment to rise by 250k

Agency for Yorkshire & the Humber 46 CRE transactions have dropped sharply

Agency for Yorkshire & the Humber 47 Half of mortgage borrowers benefit now

Agency for Yorkshire & the Humber 48 Housing market indicators weaker

Agency for Yorkshire & the Humber 49 Household consumption tracks house prices

Agency for Yorkshire & the Humber 50 Commodity prices slipping again

Agency for Yorkshire & the Humber 51 Sterling after ERM exit and EU referendum

Sterling Exchange Rate Index after Black Wednesday and EU referendum

Source: Bloomberg

Agency for Yorkshire & the Humber 52 Real wage growth is steady

Agency for Yorkshire & the Humber 53 Bank funding spreads still pretty low

Agency for Yorkshire & the Humber 54 Mortgage approval numbers

Agency for Yorkshire & the Humber 55 Financial Policy

Already done Aggregate core capital ratio projections in the stress - UK banks have added £130bn of capital since the recession - & have £600bn of liquid assets - UK banks have already been tested against a stress greater than the one they now face

What we’re doing - BoE ready to lend £250bn of funds as required - FPC will take any further actions needed to support financial stability

Agency for Yorkshire & the Humber 56 World GDP growth (UK-weighted)

Agency for Yorkshire & the Humber 57 Credit conditions better for firms – including SMEs

Bank of England’s Agents’ assessment of corporate credit availability

2011 2012 2013 2014 2015 2016 Oct Dec Aug Dec Jun Sep Dec Mar Jun Sep Dec Mar Jun Sept Dec Mar

Small

Medium

Large

Overall

Finance unavailable Normal conditions Finance readily available

Agency for Yorkshire & the Humber 58 Household spending power has been recovering

Agency for Yorkshire & the Humber 59 Core inflation subdued

Agency for Yorkshire & the Humber 60 BoE committees (1)

• MPC is responsible for price stability (as per 2% CPI inflation target) • Makes decisions on interest rates and QE

Agency for Yorkshire & the Humber 61 BoE committees (2)

• FPC’s objective is to identify and remove/reduce systemic risks to protect our financial system • E.g. housing market; overall capital requirements

Agency for Yorkshire & the Humber 62 BoE committees (3)

• Prudential Regulation Authority is UK’s prudential regulator for individual banks and insurers • Promotes safety and soundness of financial firms

Agency for Yorkshire & the Humber 63