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MNI (London)
--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:
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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