UK: BoE to act to support lending to the economy - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the rebound in high beta emerging market and commodity related currencies has continued in the Asian trading session. 

Key Quotes

“In contrast, there has been no relief for the pound which remains at sharply weaker levels following the Brexit vote. The clear signal last week from Governor Carney that the BoE is likely to ease monetary policy over the summer months in response to the negative shock to the economy has reinforced pound weakness in the near-term.

The BoE’s Financial Policy Committee met last week as well and are scheduled to release their bi-annual Financial Stability Report tomorrow. Bloomberg has reported that the BoE is planning to announce that it will cut back banks’ capital requirements, reversing a decision it took in March to raise the countercyclical buffer for UK exposures according to people with knowledge of the discussions.

According to the FT, halting the buffer would have no immediate practical impact on banks’ balance sheets as the BoE only told banks in March that they would have to start building up extra capital from 29th March 2017, at a level of 0.5% of their total assets when measured for risk, with an eventual target of 1% which would account for an estimated GBP10 billion across the banking system. However, it would provide an important signal showing that the BoE is willing to act to support credit conditions in a weaker economic environment. It could eventually include an extension of the BoE’s Funding for Lending Scheme in conjunction with the Treasury to support lending to the real economy.

Chancellor Osborne has also told the FT that he has a five point plan to help boost confidence in the UK economy following the Brexit vote including aggressive tax cuts for business, support for bank lending and a new push for investment from China. He wants a leading role to help create a “super competitive economy”. As part of the plan he wants to lower the corporate tax rate to less than 15% down from its current rate of 20% which would move it closer to the 12.5% rate on offer in Ireland. In 2015, the average corporate tax rate amongst the G20 economies was 28.7% according to the Oxford University Center for Business. He called on the BoE as well to use its powers to “avoid a contraction of credit in the economy”.”