Bank of England sees economic risks from Trump and Brexit

In a twice-yearly report, the BoE said the UK financial system remains broadly resilient amid healthier-than-expected economic growth, but that threats to banks and the wider economy persist.

BoE Gov. Mark Carney told reporters that the biggest threats are global, reflecting in part the political uncertainty fueled by populist advances in Europe and the US.

The report highlights how President-elect Trump’s victory continues to reverberate. The European Central Bank this month flagged the risk of potential economic fallout, cautioning that Trump’s policies could trigger instability.

The BoE said Wednesday that anticipation of fiscal stimulus in the US has sent money scurrying back to the US, pushing up interest rates and the dollar and ramping up pressure on some heavily indebted emerging markets. The stresses could ultimately undermine UK financial stability if they triggered heavy losses for British banks, the central bank said.

Carney added that some of the policies Trump advocated during his campaign for the presidency could, if enacted, weigh on global trade, reflecting campaign pledges that could reshape the global economic order.

“That might not directly affect the UK but if it slows the pace of global growth… it’s going to have a knock-on effect though this economy,” he said.

Trump’s victory and June’s Brexit vote are examples of largely unexpected political events that have rocked financial markets and unnerved policy makers.

Carney said that “throughout these episodes the UK financial system has stood up well,” but that resilience may be tested again, particularly as Britain’s Brexit process gets under way.

UK Prime Minister Theresa May has said she plans to formally begin the UK’s withdrawal from the EU early next year, firing the starting gun on divorce negotiations expected to take at least two years.

Carney said that a smooth and orderly transition would help British banks and businesses prepare. A disorderly process could pose a financial stability risk, he said.

He stressed a smooth transition is critical for the EU, too.

“It is important to recognize the UK is effectively the investment banker for Europe,” he said. “It is absolutely in the interests of the EU that there is an orderly transition and there is continual access to those services.”

The BoE held its benchmark interest rate steady in November after cutting it to a record low in August as part of a package of measures to support the economy following the referendum. They also lined up billions of pounds in emergency cash for banks.

Officials took no new policy actions related to financial stability on Wednesday, although they agreed to keep in place policies aimed at restraining risky mortgage lending agreed in 2014. Among other homegrown risks to stability cited in the report was rising household indebtedness.

Write to Jason Douglas at jason.douglas@wsj.com

This article was first published by The Wall Street Journal

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