BOE Adds to Brexit Defenses as Economic Outlook Dims Further

LONDON (Capital Markets in Africa) – The Bank of England is putting in place more buffers for the banking system as the prospect of a messy Brexit continues to hit companies and consumers.

The new liquidity facility will allow U.K. lenders to access euro funding around the March 29 exit date from the European Union. Last week, the central bank said it would increase the frequency of its regular liquidity operations to weekly from monthly in a move that mirrored its actions around the 2016 referendum.

The BOE is doing what it can to ensure the financial system doesn’t become weakened by Brexit and end up amplifying any shock to the economy. Governor Mark Carney, who has repeatedly warned of damage if there’s no withdrawal agreement, will address a Parliament Committee later on Tuesday.

With less than four weeks to go before the formal exit, the toll on businesses and consumers is becoming increasingly apparent. The U.K. retail sector said Tuesday that uncertainty is making consumers more reluctant to spend, and IHS Markit said the economy is close to stagnation.

Markit’s headline services PMI did offer better news than was anticipated, with the gauge unexpectedly rising in February from a 2 1/2 year low. But confidence among businesses declined to levels not seen since just after the 2016 referendum.

“Brexit concerns dominate the list of reasons cited by companies for deteriorating business performance by a wide margin,” said Chris Williamson, chief business economist at IHS Markit.

Although the prospect of crashing out of the EU without a deal seems to be fading, the BOE’s Financial Policy Committee said that such an outcome would create “significant market volatility.” It described the measure announced on Tuesday as a “prudent and precautionary step.”

The FPC, which was set up after the 2008 crisis to spot risks to financial stability, said that EU households and businesses could struggle to access some banking and market services in a no-deal withdrawal, ultimately raising the cost of doing business for banks that could ripple back to the U.K.

Source: Bloomberg Business News