MNI 5 THINGS: BOE FPC At TSC- Brexit Contract Issues A Concern

--Five things we learned from the BOE FPC members appearance in Parliament

By David Robinson

     LONDON (MNI) - Bank of England Financial Policy Committee members Alex

Brazier, Donald Kohn and Martin Taylor all underwent their re-appointment

hearings at the Treasury Select Committee Wednesday.

     Here are five things we learnt:

     -Contract continuity for derivatives after Brexit remains a pressing issue.

     With some stg26 trillion worth of contracts outstanding an agreement needs

to be struck and Brazier said he had "every confidence that that is what will

happen." Brazier said that they were in regular contact with their EU

counterparts and that they shared the Bank's analysis of the issue. EU

officials, however, have not been so reassuring in public. "I don't think there

is any action that the UK can take by itself to make the problem go away ... we

need help from the EU," Kohn said.

     -From the Bank officials' perspective, the acceleration in consumer credit

growth is not significant for monetary policy and the real economy.  Brazier

said that the rapid growth in consumer credit "only posed a risk to the lenders"

and was "not a direct macro-economic issue."  Unsecured borrowing accounts for

only a very small part of consumer spending. Changes in Bank Rate have only a

very small impact on unsecured credit as spreads are so wide, he said. Whatever

the FPC does to tackle the issue will be a sideshow for monetary policy.

Brazier's comments tie in with the speech given last week by Deputy Governor Ben

Broadbent, who said that research to-let activity since 2016 Q1 has been masked

by a pickup in owner-occupier mortgage showed financial stability measures

typically have marginal impact on the real economy and monetary policy has

marginal impact on financial stability.

     -The FPC's intervention to constrain mortgage growth at high loan-to-income

(LTI) multiples has not prevented a build up in mortgage risk. Headline

mortgage, and mortgage approval, growth has been soft but Brazier in his

questionnaire said that "the sharp slowdown in buy-lending." Owner-occupied

mortgage debt "is now rising more rapidly than household incomes for the first

time since the financial crisis," and there has been a bunching of loans just

below the 4.5 LTI threshold.

     -Kohn, a former top Fed official, saw a risk that Fed policy rates would

rise more rapidly than markets were assuming because of the fiscal stimulus

favoured by the Trump administration. Kohn and his colleagues are concerned that

markets are under-pricing risk more generally. "I do worry there is complacency

in the financial markets in the UK and elsewhere," Kohn said. Brazier said

assets were being "priced for perfection" on the assumption that interest rates

and inflation would stay relatively low and growth would continue.

     -Beneath the FPC's headline assessment that this is a normal risk

environment there are a host of issue that could spark renewed  financial

instability. "The FPC's financial stability indicators are giving very

contradictory signals at present; some ice-cold, some very hot. The current

account deficit is particularly interesting: it has shrunk since the EU

referendum (good); it remains very high (not so good); it is increasingly being

financed by short-term foreign inflows rather than asset sales by residents

(concerning)," Taylor said in his written evidence.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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