Friday 9 December 2016

Brexit could raise debt costs for UK borrowers - BoE

David Milliken and Huw Jones

Published 30/03/2016 | 02:30

Bank of England governor Mark Carney. Photo: Bloomberg
Bank of England governor Mark Carney. Photo: Bloomberg

Britain's European Union referendum could push up credit costs and weaken sterling more, the Bank of England (BoE) warned yesterday, as it moved to bolster banks' risk buffers and slow a boom in lending to landlords.

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The central bank said the outlook for financial stability had worsened since its last report in November, saying a rebound in Chinese lending was "concerning" and that June 23's vote on leaving the EU was now the biggest domestic risk.

BoE Governor Mark Carney came under fire from some pro-Brexit lawmakers earlier this month for exaggerating the dangers of leaving the EU, though the central bank does not have an official position on whether Britain should remain.

The BoE's Financial Policy Committee, which Mr Carney chairs, said yesterday that "heightened and prolonged uncertainty... could lead to a further depreciation of sterling and affect the cost... of financing for a broad range of UK borrowers."

Sterling has fallen to a seven-year low against the dollar since the start of the year and markets price in extra volatility for around the date of the referendum. But analysts at Norwegian lender Nordea said sterling could snap back after the June vote.

"Worst-case scenario" for EUR/GBP after the referendum could be levels around 82 pence to the euro, but bias for EUR/GBP would still be down toward 76 pence to 75 pence in following months, regardless of the referendum outcome, Nordea said.

The euro traded at 78 pence last night.

While much of the BoE's concern about Brexit was anticipated, less expected was its decision to tighten credit checks on landlords and move ahead with a disputed plan to vary the size of banks' risk buffers over the economic cycle.

The immediate impact of both measures is likely to be modest, but they indicate a policy direction and may have a greater effect over time if the Bank expands them.

Buy-to-let lending has boomed in Britain in recent years, and is now worth £200bn (€255bn).

However, Prime Minister David Cameron's government has been keen to boost individual home ownership and is raising taxes on the sector, leading the BoE to fear that banks' plans to raise gross lending to landlords by 20pc a year might come at the cost of credit standards.

As a result, the BoE has recommended banks ensure they take new tax rules into account when assessing loan applications, check landlords' incomes properly and ensure rental income will be enough to cover a mortgage rate of at least 5.5pc.

The BoE said most lenders already had similar rules, but that it expected enforcing the rules universally would reduce the number of mortgage approvals in three years' time by 10-20pc compared with doing nothing.

"It's timid," Capital Economics's Paul Hollingsworth said, adding that much of the gross lending growth was existing landlords switching mortgages rather than new lending.

"They are doing a lot of red flag waving rather than taking some serious action."

Tougher rules may come later, if finance minister George Osborne follows through on plans to give the BoE more powers over buy-to-let mortgage terms, in line with those it has for owner occupiers. (Reuters)

Irish Independent

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