Pensions  

Bank of England ready to pump billions into economy

Bank of England ready to pump billions into economy

Bank of England governor Mark Carney has said the bank is ready to pump £250bn into the UK economy, in an effort to reassure the market that the financial sector is strong enough to survive the shock of leaving European Union.

In a statement released just hours after the referendum result was announced, Mr Carney said the UK central bank would also be able to provide “substantial liquidity” in foreign currency, and would “consider any additional policy responses” in the “coming weeks”.

He made no direct mention of lowering interest rates or quantitative easing, the two main tools used by the bank to stimulate economic activity following the 2008 financial crisis.

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Speaking shortly after prime minister David Cameron announced his resignation, the governor said there would “inevitably ... be a period of uncertainty and adjustment” following the historic decision to leave the EU. He said this would include market and economic volatility.

However, he said the UK economy was prepared.

“The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.

“The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward,” he said.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said that defined benefit schemes would be particularly sensitive to changes in interest rates, as 48 per cent of their assets were invested in gilts and fixed income.

However, he said it was too early to say whether gilt yields would go up or down as a result of the Brexit vote.

“It’s entirely possible to construct scenarios in which gilt yields would go up and down,” he said. A major sell-off from foreign investors, for example, would push down the price of gilts, thereby pushing up the yield.

Alternatively, increased domestic demand for the safety of fixed income would push yields down, which he said “would not be good news for final salary schemes”.

He pointed out that, in the case that interest rates did go down, there wasn’t much further gilts yields could fall. “We’re close to historic lows anyway. Can we go any lower? I don’t know.”

But he said there was another concern for DB schemes: economic downturn.

“If the economy does now start to stall or even contract, as predicted by the doom-mongers on the Remain side of the campaign then corporate profits will be hit and this in turn could lead to further funding issues for employers. The only good news is that a falling exchange rate may help these businesses to export their way back to profitability,” he said.

Richard Cousins, pensions partner PwC, agreed that the effect of Brexit on pension schemes was a great unknown, and urged trustees to be vigilent.

“Today’s vote to leave the EU will mean more uncertainty and a tough period for defined benefit (DB) and defined contribution (DC) schemes,” he said.