Strategy & Operations » Financial Reporting » BoE: UK faces a ‘challenging period of uncertainty and adjustment’

THE UK faces a “challenging period of uncertainty and adjustment”, despite the economy proving resilient following the referendum result to leave the European Union, the Bank of England said.

Publishing the Bank’s minutes from its 20 September financial policy committee meeting, the FPC said it is continuing to monitor the financial stability implications of the UK’s decision to leave the EU. But until the government clarifies what the UK’s future relationship will be with the EU uncertainty remains.

The FPC said: “Heightened uncertainty about the near-term macroeconomic outlook and the United Kingdom’s future relationship with the EU is reinforcing domestic risks.”

Other risks include the property market. “In the UK commercial real estate market, the risks of a sharp adjustment are crystallising. Prices have fallen and transactions are at their lowest level since 2009,” the FPC said.

The weaker pound will smoothed the adjustment in the current account over time, but the FPC said if overseas investors’ appetite to invest in the UK diminishes it would result in tighter funding conditions for the UK real economy.

A fall in employment and household income is also a risk to the economy especially if rising debt levels cannot be serviced, the FPC said. However Britain’s banks are well capitalised and liquidity is robust to withstand to economic and financial shocks without restricting lending.

Prime minister Theresa May has yet to trigger article 50 of the Lisbon Act, which will begin the two-year long process of leaving the EU, nor has she defined the terms of the UK’s departure.

Predictions on the UK’s economic outlook are mixed and changeable. The OECD on Thursday modestly upgraded its 2016 growth forecast, increasing its gross domestic product (GDP) predictions from 1.7 percent in its June update to 1.8 percent today. It had previously warned that the UK economy could collapse if Britons voted to leave the EU on the 23 June referendum.

Following the OECD’s upwards revision, chancellor Philip Hammond said: “I am confident that we have the tools necessary to support the economy as we adjust to a new relationship with the EU.”

By asset size the UK’s financial system is around ten times GDP is protecting its stability is vital both for the domestic economy and the global economy.

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