“There is evidence that some risks have begun to crystallize,” the Bank of England said. “The current outlook for UK financial stability is challenging.”
The BOE announced it is easing regulations for lending to ensure credit does not dry up, clogging the infrastructure of the banking system. By lowering the capital that banks are required to hold, the BOE estimated it would increase available funds for consumer and commercial borrowers by 150 billion pounds.
The announcement revived London’s flagging stock market. The FTSE 100 index had plunged immediately following the vote to leave the economic and political alliance that has tied Britain to continental Europe for the past four decades. But the benchmark index quickly made up that ground — and more — reaching the highest level so far this year at the end of last week. By Tuesday, the rally had lost some of its steam, trading back in the red until the bank’s remarks turned the index positive.
The cloudy economic outlook has rattled investors’ confidence in Britain’s currency, which slid to a new 31-year low against the dollar on Tuesday, edging below even the sharp decline suffered immediately after the referendum. The turmoil has sent investors fleeing for safe havens such as U.S. government bonds. Yields on the 10-year Treasury note, which move in the opposite direction of prices, have plunged from more than 2 percent at the start of the year to just 1.46 percent this week.
Businesses also expressed growing pessimism about the future of Britain’s economy. A survey released Tuesday by YouGov and the Centre for Economics and Business Research found that the share of companies with a negative outlook for the next 12 months has nearly doubled since the referendum from 25 percent to 49 percent. Expectations for domestic sales, exports and investment all fell dramatically.
“What all the players in the economy are searching for at the moment is certainty,” said Stephen Harmston, head of YouGov Reports.
Five of Britain’s largest business groups issued an open letter Tuesday calling for clarity from political leadership, which has been embroiled in a Machiavellian play for power since the vote. The groups sought confirmation that long-term infrastructure investments would continue and reassurance that European Union nationals who are working in Britain would be able to stay in the country.
“Addressing these key issues would be a shot in the arm for business confidence, and send the right signals across the world,” the letter stated. “This may be a time for calm reflection, but it is not a time for inaction.”
Many analysts believe that the vote to exit the E.U. — popularly known as “Brexit” — is damaging Britain’s economy and could possibly tip it into recession. S&P and Fitch have downgraded the island nation’s credit ratings, while Moody’s assigned it a negative outlook.
A slowdown, or worse, in Britain could also spill over into other countries. On Tuesday, S&P estimated growth across Europe would be reduced by 0.8 percent over 2017 and 2018. But it cautioned that there are still many unknowns: The country’s top political office is up for grabs, and leaders have barely begun to lay the groundwork for negotiating the terms of Britain’s departure.
“Heightened uncertainty following the referendum means that any forecasts about Brexit's economic impact ought be taken with caution,” the report stated.
Still, Mark Carney, the governor of the Bank of England, emphasized that Britain’s financial system remains fundamentally sound, and the impact of the referendum has not been as bad as the worst-case scenarios in the central bank's annual stress tests. Many analysts are expecting the BOE will also cut interest rates when it meets next month, or perhaps sooner, making borrowing even cheaper for consumers and businesses.
“It’s extremely important that any monetary action, whatever it will be, is well-aimed,” Carney said.