The Bank of England’s view on your finances

Governor of the Bank of England Mark Carney has helped steer the economy through some challenging seas since 2013. He had been set to stand down in June 2019, after a six-year stint, but will now stay until at least the end of January 2020.

The announcement that he will stay on to see the bank through Brexit has been welcomed by the Government. But although he seems to be looking forward to an extended turn at the controls, Mr Carney is a worried man. We look at what is worrying him – and whether the rest of us should be worried as well.

Brexit

Brexit is of course the biggest worry for the Governor, and Mr. Carney has explained that it was behind his decision to stay on. His view is that the uncertainty about the Brexit process has already had negative effects on the broader economy and on people’s incomes.

A no-deal Brexit, where there is no formal agreement between Britain and the European Union would make those effects worse. He has already started preparations for a no-deal scenario, ‘stress testing’ banks against to make sure they have a financial safety net with ample funds in case of a no deal Brexit.

Mr. Carney recently focussed the minds of many in the country with talk of a no deal Brexit leading to a 30% drop in the value of homes. This has been clarified as simply part of an apocalyptic ‘doomsday scenario’, part of the preparation exercises, and is not intended as a prediction.

The other piece of good news is that the major banks all passed the test, giving reassurance that the financial system can cope with whatever happens next year.

Debt in the UK

Mr Carney is worried that Britain’s households are building up debt at an alarming rate.

The ratio of household debt to GDP is heading back towards the peaks seen before the financial crash. Borrowing on loans, credit cards, overdrafts and second mortgages has rocketed. Many households have got into arrears.

Any collapse in confidence could burst the debt bubble, sparking a new financial crisis in the UK economy.

Mr. Carney’s doomsday scenarios have undoubtedly looked at ways of coping with this possibility, too.

Debt crisis in China

There may also be concerned about Chinese debt. China has been building up its debt load very rapidly, thanks to enormous stimulus measures in the aftermath of the global financial crisis. An over reaction to this domestic debt could conceivably cause a sudden contraction in the Chinese economy. With China now a major player on the world economic stage the consequences could include another global crisis. Again, we can expect the Bank of England to be prepared.

Cyber attack

Finally, Mr Carney has voiced his concerns about a new kind of financial threat, one that until recently seemed confined to the realms of science fiction. As recent problems with TSB have shown, banks are now totally dependent on digital communications. An organised cyber-attack from an unfriendly foreign power could bring down a whole bank.

But on a positive note

Mr. Carney reportedly told a meeting of the cabinet that Theresa May‘s blueprint for Brexit could give the economy a £16bn boost if a deal with Brussels is reached.  He predicts that if a deal can be struck to provide a free trade area for goods, agriculture and financial services, there would be an economic bounce which we would all benefit from.

If you have your own worries about the financial future, at Continuum we would be pleased to help you find solutions.

The value of investments can fall as well as rise and you may get back less than you invested.

Sources:

independent.co.uk – Mark Carney predicts ‘£16bn boost to economy’ if Theresa May secures Chequers Brexit deal with EU – 16th Spetember 2018

theguardian.com – The UK’s debt crisis – in figures – 18th September 2018