Brexit has seen another problem; the Bank of England tightens its credit rules for banks after Brexit’s resilence.
The Bank of England stretched its powers on bank credit to more normal levels on Tuesday, saying the risk had passed of a big hit to the economy and lending after last year’s Brexit vote.
The Bank of England’s Financial Policy Committee (FPC) said British banks must now keep 5.7 billion pounds between them as an extra allowance against bad times, and that it will most likely double that before December this year.
After voters had decided to leave the EU last year, the FPC cut to zero a requirement that banks create an extra capital allowance as part of a broad range of stimulus proposals to help the nation cope with the shock.
But the economy has done more sharply than anticipated since the referendum, despite some new signs of a slowdown. Some of the central banks’ interest rate setters now say it is time to raise its main interest rate.
Bank of England Governor Mark Carney said the FPC’s action did not in itself imply that monetary policy was also about to be stricter.
Carney told a news conference, “monetary policy is the last line of defence to address financial stability issues.”
“In that regard, we don’t need monetary policy to do our job. In fact, by doing our job, we allow monetary policy to focus on its job which is returning inflation sustainably to target in an exceptional period.”
Inflation in Britain is above the Bank of England’s target at 2.9% and is set to rise as sterling’s fall since last year’s Brexit vote feeds through into prices. Carney expects this will not be permanent but other policymakers say it could have a constant impact and want to lift interest rates off their record low.
The FPC said that risks to Britain’s economy from its financial system were back at a “standard” level and that banks should set the buffer higher in a case of a future downturn.
The FPC set its counter-cyclical capital buffer (CCyB) higher which rises and falls along with the ups and downs of the economy to 0.5% from zero, with a one-year implementation period.
It anticipated raising the buffer to 1% in November, the level that reflects an economy that is running regularly.
The Bank of England also said regulators would publish stricter rules on consumer lending in July and it would bring forward to September from November its checks if banks could cope with consumer loans losses.
J.P. Morgan economist Allan Monks said the Bank of England’s move on Tuesday was reasonable and seemingly reflected signs that consumer loans have already started to slow after growing at its fastest pace in 11 years in late 2016.
“The Bank of England’s response to the strength in consumer lending was towards the milder end of the range of potential outcomes,” he said.
Bank shares fell after Tuesday’s BoE decision but quickly recovered to their levels earlier on Tuesday.