MNI POLICY: BOE Carney Sees Global Deceleration As China Cools

By David Robinson

     LONDON (MNI) - Bank of England Governor Mark Carney painted a picture of a

cooling global economy, with China's slowdown set to deepen, as he and

colleagues gave evidence on the November Financial Stability Report to the

Treasury Select Committee Wednesday.

     Following are key points:

     --Carney said there was clear evidence the Chinese economy has slowed and

that he expected it to continue to slow this year, contributing to a

deceleration in global growth.

     He said Chinese growth has eased from yearly rates of 6 percent plus "down

to the low 6s, potentially into the high 5s."

     "That is material for an economy that is now 15% of global GDP and you feel

the effects and it is one of the reasons for a broader global deceleration that

appears to be underway," he said.

     --The UK's swollen current account deficit poses a stability risk because

of the composition of its funding, which comes largely from overseas buying of

UK property and leveraged loans, Alex Brazier, Executive Director Financial

Stability Strategy and Risk, said.

     Brazier said the deficit, at 5% of GDP, "is the biggest in the G7" and it

"is being financed from capital inflows from abroad. Sixty percent of that over

the past year can be accounted for by people buying UK commercial real estate

and buying leveraged loans of UK companies."

     Brazier added that it was "not difficult to imagine a number of things ...

that could change that risk appetite."

     These risks include that of the UK adopting a less open trade policy which

would entail "that the sustainable current account in the future could be much

lower than it is today."

     --Carney said the assumption that Bank Rate would move sharply higher in

Bank's 2018 bank stress-test scenario was purely mechanical - with policy

responding to an inflation overshoot and output gap. Under the scenario, GDP

falls by 4.7%, sterling falls by 275 and Bank Rate rises to 4.0%.

     He said that it was "natural" to assume Bank Rate would rise in response to

a substantial overshoot of the 2% target but that the stress tests did not look

at how far policymakers could go in looking through that overshoot to support

economic activity.

     --Treasury Committee members raised the hot button issue of the latest

Brexit developments but Carney and his colleagues were cautious about commenting

on the fast-evolving events.

     Richard Sharp, an external member of the Financial Policy Committee who

leaves at the end of March, highlighted the risk the Brexit process posed to

business and financial investment.

     "The backdrop is a slowing global economy and that ... means investment

decisions are constrained ... (There is) more fragility associated with any

decisions to increase capacity in that environment. And then if you add another

layer of risk on top of that it makes it a pretty easy decision to hold back,"

he said.

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

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