Last Thursday, Mark Carney, Governor of the Bank of England (BoE) made a speech in the court room at the Bank of England
The title of the speech was ‘Uncertainty, the economy and policy’ and if anyone was in doubt about the seriousness of the content, his second and third sentence quickly dispelled them:
“The result of the referendum is clear. Its full implications for the economy are not.”
Before the referendum on the UK’s position within the EU, Carney was very clear about the consequences of a ‘leave’ vote. I’m sure he was quietly hopeful that this speech would never see the light of day, however Boris Johnson managed to convince enough voters to push the self destruct button.
But back to Carney’s speech, as he noted:
“The question is not whether the UK will adjust but rather how quickly and how well.”
While Carney talked positively about the UK’s ability to handle change – its flexible workforce, world class infrastructure and well defined laws, there is still a huge amount uncertainty:
“Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time.”
Carney illustrated this further:
“At times of great uncertainty, households, businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job? Will I keep mine?”
Carney was very keen to stress that the Bank of England was well prepared both for the outcome of the referendum and ongoing support to ensure the stability of the financial system, specifically:
“The reforms have been enormous, with the capital requirements of our largest banks now ten times higher than before the crisis. Moreover, the Bank has stress tested our major banks and building societies against scenarios far more severe than the country currently faces. In fact, our 2015 stress test entailed losses twice those experienced during the financial crisis […] The Bank of England continues to stand ready to provide more than GBP250bn of additional funds through its normal facilities.”
Carney announced a new measure to help to provide bank liquidity:
“As a further precaution, reflecting the possibility that heightened uncertainty may last a while longer, today the Bank of England is announcing that it will continue to offer Indexed Long Term Repo Operations on a weekly basis until end of September 2016. This will provide additional flexibility in the Bank’s provision of liquidity insurance over the coming months.”
The BoE Governor expressed his concern and highlighted the downside possibilities:
“As a result of increased uncertainty and tighter financial conditions, UK households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. Through financial market and confidence channels, there are also risks of adverse spillovers to the global economy.”
So what does this all mean for the BoE’s monetary policy? On that point, Carney noted:
“In my view, and I am not pre judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.”
For investors worldwide, the economic outlook may be uncertain but the financial consequences are becoming clearer. My view is that investors should be positioning their portfolios for further volatility within a low inflation, low growth and low return environment. If you believe that these outcomes are likely, then short dated corporate credit can offer attractive risk adjusted returns.