Bank of England's Brexit fallout plan working, insists governor Mark Carney
BANK of England governor Mark Carney said plans to contain the fallout from the Brexit vote were working as he announced a move to boost lending to households and businesses by up to £150 billion.
He assured Britons they can remain confident that they can borrow as needed after the Bank took action to relax funding rules for lenders.
But on unveiling the Bank's twice-yearly Financial Stability Report on Tuesday, Mr Carney warned over the vulnerability of households with high levels of debt to an economic slowdown.
He stopped short of repeating caution over a possible recession, but said there was the "prospect of a material slowing of the economy" following the Brexit vote, while the report said the outlook for financial stability was "challenging".
The Bank's move to help bolster the ability of banks to lend comes as part of a raft of measures announced since the referendum decision to shore up the financial system and soothe nerves.
Mr Carney said: "The Bank has a clear plan. We are rapidly putting its main elements in place. And it is working."
Chancellor George Osborne hailed the Bank's decision to loosen rules for lenders as an "important move".
He added that he was "meeting major banks in Downing Street shortly to discuss response to referendum result".
"We need great national effort to steer UK through," he said.
The Bank will reduce the capital required to be held on banks' balance sheets by £5.7 billion, which it said would help bolster their ability to lend by up to £150 billion.
The so-called countercyclical capital buffer rate has been slashed to zero from 0.5 per cent and will remain at that level for at least a year, it said.
Mr Carney described it as a "major change", meaning three-quarters of major UK banks have seen their ability to lend bolstered.
"Today's action means that UK households and business who want to seize viable opportunities in a post-referendum world can be confident they will be supported by the financial system," he said.
But he said the Bank will not be able to "fully and immediately offset the market and economic volatility" after the Brexit vote.
The pound earlier fell to a new 31-year low against the US dollar as the aftermath of the Brexit vote continues to take its toll.
The Bank cautioned over the impact of the vote in its financial stability report, saying there will be a period of "uncertainty and adjustment".
"It will take time for the UK to establish new relationships with the EU and the rest of the world," it said.
It confirmed risks to the economy following the vote, warning over the UK's gaping current account deficit, which stands close to all-time record highs, at 6.9 per cent of gross domestic product.
The Bank said it also remains concerned about the buy-to-let market, while it added that the global economy and Eurozone looks vulnerable to a "prolonged period of heightened uncertainty".
But it said that, despite a severe hit to the pound and falls of up to 20 per cent for bank shares since the referendum, the banking sector has so far proved resilient, with little sign so far of a credit squeeze.
The UK's financial system is in good health, with lenders having raised more than £130bn in capital since the financial crisis, according to the Bank.
This means banks have flexibility to continue lending "even during challenging times", it said.
The latest action taken by the Bank comes after Mr Carney said last week that policymakers were likely to slash interest rates over the summer, hinting at a cut later this month or in August.
Rates are now expected to fall to zero by the end of the year from their already historic low of 0.5 per cent.
Mr Carney also signalled the possibility of the Bank reviving its quantitative easing (QE) programme, having already pledged to pump in at least £250bn if needed to calm markets in the immediate aftermath of the Brexit decision.
And the Chancellor said on Monday that the Treasury stood ready to work with the Bank to expand its Funding for Lending scheme (FLS), which offers banks cheap access to finance on the basis that they lend more.
James Knightley, at ING, said he believes the Bank will cut rates to 0.25 per cent in August and expand QE up to £500bn.
"The general belief is that this will support asset prices and confidence, but with the UK potentially facing years of uncertainty this is unlikely to be enough to prevent a recession in early 2017," he warned.