Bank of England governor Mark Carney has warned of a “risk premium” being attached to UK assets because of the threat of Brexit.
Mr Carney was addressing the Treasury select committee on the Bank of England’s financial stability report this morning (26 January).
He was asked what risks the UK’s current account deficit posed and whether this would be exacerbated by Britain leaving the European Union.
Mr Carney said: “The general global environment has become much more febrile, much more volatile and relying on the kindness of strangers is not optimal in that type of environment and that is what is the case when you are running a 4 per cent or 4.5 per cent current account deficit.
“And secondly the possiblity of a risk premium being attached to UK assets because of certain developments exists and that plays into the riskiness of the situation.”
Mr Carney went on to say that negative interest rates were not a prospect but said the monetary policy committee has been doing some work on this.
He said: “The MPC stopped at 0.5 per cent and then began to purchase assets because at the time the feeling was given the balance sheets of particularly building societies going any lower would be counter productive and would undercut the capital positions of building societies and restrict access to credit.
“In the intervening years building societies have by and large rebuilt their capital positions and we gave a judgement as the MPC in the past year that we could if necessary go below that 0.5 per cent towards zero.
“We did not give a judgement that we felt it would be productive or appropriate to go negative given the importance of building societies to this financial system, now that is something we have to constantly keep under review.”
Earlier this month Mr Carney gave a speech which postponed an increase in interest rates.
Mr Carney, who had predicted several month ago that an increase in interest rates would come into “sharper relief” at the beginning of this year, said the time is no longer right to raise the base rate because of uncertainty around the global economy.
Speaking to the Treasury select committee today Mr Carney said the Fed’s decision to increase rates last month had “made a contribution” to this year’s market volatility.
In a wide-ranging session Mr Carney also appeared to express frustration about the FCA’s decision to drop its review into banking culture.
He was asked by Andrew Tyrie, the chairman of the committee, whether he was concerned about the regulator’s decision to drop the review without consulting its board.
Mr Carney said: “The appropriate channel would have been through the board of the FCA and as you have said the board was not informed.
Earlier this month FCA chairman John Griffith-Jones appeared before the Treasury Select Committee to defend the regulator’s decision.