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Climate emergency protests ahead of Bank of England financial stability report - business live Bank of England: No-deal Brexit could cause 'significant' market turmoil - business live
(32 minutes later)
Governor Carney is running through the key points we covered earlier -- the UK financial system is ready for a no-deal Brexit, but there would still be major market volatility.
Turning to the rest of the world, Carney points out that global business confidence has been hit by worries about a global trade war. Markets are pricing in lower growth rates, and lower corporate profits, he adds.
There are reasons to worry, he adds. For example, credit growth in China is growing faster than earnings growth, and emerging markets are vulnerable to capital outflows.
Mark Carney begins by pointing out that Brexit is the single most important determinant of the UK’s economic outlook.
Material risks still remain, he warns, even though firms are more prepared for Brexit.
Carney also warns that there could be disruption to cross-border financial links unless EU regulators do more -- that would hurt EU-based families and businesses, and possibly those in the UK too.
The Bank of England is holding a press conference now to discuss the Financial Stability Report.
You can watch it online here (unless you’re too busy following the exciting cricket....)
Here’s the key message from the Bank of England’s financial stability report (which you can read online here).
Bank resilience: Major UK banks and insurers are strong enough to handle a worst-case disorderly Brexit and continue to serve households and businesses.
Brexit checklist: The biggest risks of disruption in a worst-case disorderly Brexit to financial services used by UK households and businesses have been addressed.
Global outlook: A trade war would damage the global economy at a difficult time. But UK banks are strong enough to keep lending.
Climate change: We will test that the UK financial system can handle the risks from climate change and support the transition to a carbon-neutral economy.
The Bank of England has outlined plans to test whether the UK financial system can survive the climate emergency.
It says it will publish a discussion paper in autumn 2019, and complete full stress tests by 2021.
Financial stability risks from climate change arise both from the physical risks associated with the increased frequency of extreme weather events and from the transition to a carbon-neutral economy.
This exercise will integrate climate scenarios with macroeconomic and financial system models. It will motivate firms to address data gaps and to develop cutting-edge risk management consistent with a range of possible climate pathways: ranging from early and orderly to late and disruptive.
The discussion paper will cover issues such as the coverage of the test, the nature of scenarios considered, the appropriate time horizon and disclosure of results. This will allow the Bank to develop the scenarios in consultation with risk specialists from across the financial sector, climate scientists, other industry experts, and other informed stakeholder groups.
The Bank of England points out that Brexit worries have pushed the pound down, and have dragged on stock prices too.
It says:
Increased Brexit uncertainties have put additional downward pressure on UK forward interest rates and led to a decline in the sterling exchange rate and an underperformance of UK-focused equities. In markets that are particularly dependent on foreign investors – notably commercial real estate and leveraged lending - investment into the UK was much weaker in 2019 Q1 than in recent years.
Earlier this week the pound hit a six-month low against the US dollar (a two-year low, if you ignore an odd market ‘flash crash’ in January).
But the BoE insists that the banks can cope.... even if Donald Trump unleashes a deeper trade war.
As the Bank puts it:
The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit...
Even if a protectionist-driven global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, the FPC judges that the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks.
The Bank of England also warns that Britain could suffer “significant market volatility” in the event of a disorderly Brexit.
The Financial Stability Report warns:
“Financial stability is not the same as market stability. Significant volatility and asset price changes are to be expected in a disorderly Brexit.”
That’s a warning that we could see some serious turmoil in the stock market, and on the foreign exchanges, if the UK leaves the EU without a deal.
Breaking! The Bank of England believes the UK banking sector is strong enough to withstand a disorderly Brexit, and an intensified trade war.Breaking! The Bank of England believes the UK banking sector is strong enough to withstand a disorderly Brexit, and an intensified trade war.
Its latest financial stability report has just been released, showing that the UK’s banks have enough capital to ride out a double-whammy of disruption at home and abroad.Its latest financial stability report has just been released, showing that the UK’s banks have enough capital to ride out a double-whammy of disruption at home and abroad.
The BoE’s Financial Policy Committee says:The BoE’s Financial Policy Committee says:
“The perceived likelihood of a no-deal Brexit has increased since the start of the year,”“The perceived likelihood of a no-deal Brexit has increased since the start of the year,”
“The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit.“The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit.
More to follow...More to follow...
Here’s a photo of a petition card being delivered to the Bank of England (perhaps to one of its pink frock coat-wearing security guards).Here’s a photo of a petition card being delivered to the Bank of England (perhaps to one of its pink frock coat-wearing security guards).
Analysts at Royal Bank of Canada have predicted that the Bank of England will slash interest rates from 0.75% to 0.5% immediately, if Britain leaves the EU without a deal this autumn.Analysts at Royal Bank of Canada have predicted that the Bank of England will slash interest rates from 0.75% to 0.5% immediately, if Britain leaves the EU without a deal this autumn.
But if Britain leaves with a deal, they think the BoE will sit on its hands for some time....But if Britain leaves with a deal, they think the BoE will sit on its hands for some time....
RBC told clients this morning:RBC told clients this morning:
In the event of a no-deal Brexit on October 31st, we see an immediate 25bps rate cut, possibly even before the scheduled MPC meeting on November 7th.We further think that immediate response would be followed-up by a further 25bps cut and the restarting of the bank’s QE policy before the end of the year.In the event of a no-deal Brexit on October 31st, we see an immediate 25bps rate cut, possibly even before the scheduled MPC meeting on November 7th.We further think that immediate response would be followed-up by a further 25bps cut and the restarting of the bank’s QE policy before the end of the year.
In the event of a smooth Brexit, therefore, we don’t see the MPC delivering on its current forward guidance but rather see Bank Rate unchanged through 2020.In the event of a smooth Brexit, therefore, we don’t see the MPC delivering on its current forward guidance but rather see Bank Rate unchanged through 2020.
One protestor is even quoting one of Mark Carney’s recent articles on the climate emergency (we published it here), which called on the financial sector to help tackle the problem.One protestor is even quoting one of Mark Carney’s recent articles on the climate emergency (we published it here), which called on the financial sector to help tackle the problem.
The group are positioned outside the Bank’s offices on Threadneedle Street, in the centre of the City:The group are positioned outside the Bank’s offices on Threadneedle Street, in the centre of the City:
You can sign the petition urging the Bank of England to help decarbonise the economy and support investment in low-carbon companies and technologies here.You can sign the petition urging the Bank of England to help decarbonise the economy and support investment in low-carbon companies and technologies here.
The letter recognises that BoE governor Mark Carney has spoken out about the issue -- including in a speech in March, urging governments to deliver coherent and credible policies. But more action is needed to drive the UK’s “green transition”.The letter recognises that BoE governor Mark Carney has spoken out about the issue -- including in a speech in March, urging governments to deliver coherent and credible policies. But more action is needed to drive the UK’s “green transition”.
Rather than buying bonds from oil companies, for example, the Bank could help support a Green New Deal by deterring banks from funding environmentally damaging projects.Rather than buying bonds from oil companies, for example, the Bank could help support a Green New Deal by deterring banks from funding environmentally damaging projects.
Addressed to Carney, the letter says:Addressed to Carney, the letter says:
Your recent warning about the “devastating effects” of climate change has provided a much-needed wake-up call to the world’s banks, investors and regulators. It’s brilliant to see you set a powerful example by announcing that the Bank of England will disclose its own climate risk.Your recent warning about the “devastating effects” of climate change has provided a much-needed wake-up call to the world’s banks, investors and regulators. It’s brilliant to see you set a powerful example by announcing that the Bank of England will disclose its own climate risk.
But we know you can and must go further. You rightly acknowledge that meeting even the modest targets of the Paris Agreement will require a “massive reallocation of capital”. But this is unlikely to happen unless central banks play a leading role.But we know you can and must go further. You rightly acknowledge that meeting even the modest targets of the Paris Agreement will require a “massive reallocation of capital”. But this is unlikely to happen unless central banks play a leading role.
"What do we want!? Green investment! When do we want it!? NOW!!" The climate emergency is on our doorstep we need to #GreenTheBoE today! If you agree sign here > https://t.co/pHbDJllbRa pic.twitter.com/ssKrI8qXN9"What do we want!? Green investment! When do we want it!? NOW!!" The climate emergency is on our doorstep we need to #GreenTheBoE today! If you agree sign here > https://t.co/pHbDJllbRa pic.twitter.com/ssKrI8qXN9
The demonstrators are chanting “Whose climate? Our climate” outside the Bank:
Protestors are chanting “whose climate, our climate” and say the Bank has Shell and BP assets on its balance sheet from QE pic.twitter.com/FpreOhpIVE
Rachel Oliver, head of campaigns at @PositiveMoneyUK, says they want the Bank to take climate risks as seriously as other risks, such as for mortgages. She says credit guidance could be used to penalise carbon linked assets
Today’s protests are organised by Positive Money and Fossil Free London, who argue that the climate emergency is a massive threat to financial stability.
As such, the Bank should prioritise climate change when assessing the risks to the UK economy and the financial system.
That includes using its bond-buying stimulus programme to support green companies, rather than those who pollute the planet and fuel carbon emissions.
They explain:
The Bank of England rightly recognises that climate change represents a huge risk to financial stability, estimating that it may lead to $20tn in losses - nearly ten times UK GDP. However, while the central bank has made good progress in talking the talk, it has not always walked the walk, continuing to shy away from treating climate change with the same gravity it gives to other risks to financial stability, such as risky mortgage lending.
The Bank of England itself has also been culpable in fuelling carbon bubbles, buying bonds in high-carbon companies such as the likes of Shell and BP with money created through its corporate QE programme. Positive Money and Fossil Free London wants the Bank of England’s power to create money to be used in a way that helps rather than hinders the green transition.
A group of campaigners have assembled outside the Bank of England, demanding it does more to tackle the climate emergency.
They will hand over two A1 postcards signed by hundreds of members of the public during the recent Glastonbury festival, addressed to governor Mark Carney with the text:
“We the undersigned urge you to use the Bank of England’s powers to unleash green investment now!”
They have two key demands:
That the Bank of England ‘greens’ its quantitative easing (QE) programme. With speculation mounting that the Bank could undertake more QE in response to a Brexit shock or another recession, the central bank should at the very least rule out asset purchases in high-carbon sectors, if not actively favour bonds which finance green projects
That the Bank of England uses all of the powers at its disposal to stop financial firms it regulates pouring more money into fossil fuels. This approach, known as ‘credit guidance’, could include tools such as differential collateral requirements and targeted refinancing operations
My colleague Richard Partington is there (on his way to read the financial stability report), and sent these pictures:
Protestors outside the Bank of England this morning ahead of its regular financial stability report press conference pic.twitter.com/BaMaCg9iu6
The protestors organised by ⁦@PositiveMoneyUK⁩ and @divestlondon say the UK needs a “complete reorientation of the banking system” - calling for “Green QE” to decarbonise the economy pic.twitter.com/FmGjm00Wkk
Carney, incidentally, was also at Glastonbury, telling the Economist that he enjoyed the Friday night headline slot by grime artist Stormzy.
“I very much enjoyed Stormzy. He puts his money where his mouth is in terms of building a more diverse society.”
Mohamed A. El-Erian , chief economic adviser at Allianz, explains why today’s financial stability report (released at 10.30am UK time) matters:
Good morning.While many institutions now publish "financial stability reports." that of the @BankOfEngland remains one of the most insightful. The latest edition is due out today -- at a time when some key measures of financial conditions are at their loosest levels in 25 years.
The oil price has hit its highest level since late May, after three Iranian boats “attempted to impede” a British oil tanker in the Gulf.
My colleague Bethan McKernan reports:
The incident took place in the strait of Hormuz through which the commercial vessel, British Heritage, was attempting to pass. It comes in the wake of the UK seizure of an Iranian oil tanker last week, for which Tehran had threatened retaliation.
“Contrary to international law, three Iranian vessels attempted to impede the passage of a commercial vessel, British Heritage, through the strait of Hormuz,” a UK government statement released on Thursday morning said.
The British warship, HMS Montrose was “forced to position herself between the Iranian vessels and British Heritage and issue verbal warnings to the Iranian vessels, which then turned away,” the statement said.
Iranian boats 'attempted to impede' British oil tanker in strait of Hormuz
This has pushed the cost of a barrel of Brent crude oil up to $67.53 per barrel this morning, on fears that supplies from the Middle East could be disrupted.
Commodity prices are also rallying, sending palladium up to $1,600 per ounce for the first time since March.
Palladium is used in car catalytic converters, so a pick-up in economic demand can push its price higher. Plus, anything priced in dollars can go up when the US currency weakens.
The weakness of the dollar is giving sterling some support this morning, pushing the pound back over $1.25 (away from a six-month low).
European stocks are also pushing higher, with the Stoxx 600 index gaining 0.3%.
In London, house builders are among the top risers after the latest RICS survey of chartered surveyors suggested the market was picking up.
America’s S&P 500 stock index surged over the 3,000 point mark for the first time ever yesterday, after Fed chair Jerome Powell signalled that a rate cut is close.
Powell’s dovishness has pushed stock markets higher across the globe. Japan’s Nikkei gained 110 points, or 0.5%, to 21,643.53, and there were gains in Hong Kong (+0.7%), South Korea (+1.1%) and India (+0.5%) too.
Konstantinos Anthis, Head of Research at ADSS, says investors believe the Federal Reserve is certain to cut borrowing costs at its next meeting.
A July rate cut seems set in stone as Powell cites geopolitical uncertainties and global growth slowdown as the reasons why an easier policy will help sustain the expansion domestically.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
These are difficult times for the UK economy, with Brexit unresolved, the eurozone struggling, the global economy slowing and trade tensions on a knife-edge.
So the Bank of England’s latest financial stability report, released this morning, will show whether policymakers are getting more anxious that the next financial crisis is looming
The report will assess the stability of the UK financial system, and outline what the Bank is doing to remove or reduce any risks to it. The BoE will also release its Systemic Risk Survey Results, showing what investors are particularly worried about.
This is the final risk assessment before 31 October, the current Brexit date, so investors will be keen to hear the Bank’s views.
Mark Carney will face a grilling from the press at 11am. UK issues will obviously dominate, but the BoE governor may also be asked about his own prospects -- is he hoping to replace Christine Lagarde at the head of the International Monetary Fund?
Traders, meanwhile, are pushing asset prices higher as they anticipate a US interest rate cut later this month.
Yesterday, Federal Reserve chair Jerome Powell told Congress that America’s economy was suffering from a weakening global economy and rising trade tensions, a cue that policymakers will ease conditions soon.
Fed chairman hints at first interest rate cut in over a decade
Ipek Ozkardeskaya, analyst at London Capital Group, explains:
The US dollar gave back gains on a sharp move after the Federal Reserve (Fed) Governor Jerome Powell has been very clear that the global economic slowdown outweighs the encouraging data in the US at his speech before the congress on Wednesday.
Powell’s testimony gave yet another solid sign that the Fed is preparing to cut the interest rates in July. In the wake of Powell’s first day of testimony, the market sees a 25-basis-point cut as largely granted
That weakened the dollar, and drove Wall Street to a record high last night.
European stock markets are expected to rise this morning, pushing Britain’s FTSE 100 towards an 11-month high.
European Opening Calls:#FTSE 7559 +0.37%#DAX 12432 +0.47%#CAC 5590 +0.40%#MIB 22169 +0.56%#IBEX 9282 +0.32%
Dollar weakness continuing this morning, trading 0.22% lower:#EURUSD 1.12694 +0.17%#GBPUSD 1.25278 +0.21%#USDJPY 107.988 -0.44%#USDCAD 1.30589 -0.17%#AUDUSD 0.69725 +0.19%#USDCHF 0.98683 -0.27% pic.twitter.com/4KFNGic76a
Powell is back on Capitol Hill later today to take questions from the Senate, so could double-down on his dovish message. We also get new US inflation and unemployment data.
The agenda
10.30am BST: Bank of England publishes financial stability report
11am BST: BoE press conference with Mark Carney
1.30pm BST: US consumer inflation data for June (expected to drop to 1.6% y/y from 1.8%)
1.30pm BST: US initial jobless claims figures for last week
3pm BST: Fed chair Jerome Powell testifies