The upcoming EU Referendum ranks as a risk factor
Prospects for growth are muted, according to the Bank of England’s Financial Policy Committee (FPC). Low levels of inflation, investment and productivity growth pose threats to banks’ resilience against market shocks, particularly in emerging markets. Comparatively developed markets are not without risk either, as they juggle low interest rates with weak growth.
“The outlook for financial stability has deteriorated since [the Committee] last met in November 2015,” according to the FPC’s statement. Reasons for this range from risks already in existence to newer domestic and global risk.
The FPC lists the UK’s upcoming EU Referendum as the largest domestic risk to financial stability, with the impact of this already prevalent on pound sterling (GBP) spot and option markets.
“Businesses buying currencies through spot contracts have suffered losses from the recent depreciation of sterling, as a result of the fears surrounding the EU Referendum,” says Carl Hasty, Director of currency exchange company Smart Currency Business. “We are expecting to see more demand for currency exchange hedging strategies, with businesses taking action to minimise losses for upcoming transactions.”
However, the FPC has also heeded the results from its 2014 stress test, the year in which a referendum on Scottish Independence placed downward pressure on sterling strength. This, combined with changes in capital flows, increased unemployment and an extended recession, was weathered by the banking industry. Its resilience has increased since then, according to the FPC.
The FPC’s growth outlook reflects the International Monetary Fund’s (IMF) warning earlier this year about the growing risk of ‘economic derailment’ worldwide. Central banks like the US Federal Reserve are also cautious about the global economic outlook, with Chair Janet Yellen conveying yesterday that the US central bank will ‘proceed cautiously’ in terms of its upcoming policy decisions.