Bank of England governor Mark Carney says the slumped FTSE 250 points to the economic gloom ahead, as the central bank releases its first financial stability report following the UK’s vote to leave the European Union.
Carney says the mid cap index is a better barometer of the economic outlook than the FTSE 100 due to its domestic focus.
The FTSE 250 dropped 6.1 per cent in the week following the UK’s Brexit vote, while the FTSE 100, which includes many global companies with foreign revenue streams, rose 2.7 per cent.
Human capital, the rule of law, infrastructure and institutions will help the UK economy adjust to the fallout out from the vote, Carney says.
He adds that the financial system is “doing its job” in the period following the referendum and the bank is committed to any necessary intervention.
Speaking at a press conference, Carney said: “The comment I would make on the equity markets is that I would focus more on domestically-focused stocks of the FTSE 250 or the component of the FTSE that is principally serving this economy.
“There’s been a much more significant move in those equities in pound terms and in common currency terms, certainly in dollar terms.
“That gives a sense of investor expectations, which may not prove out, but investor expectations about the direction of the economy.”
The FTSE 100 has benefited from the slumped pound, which today hit a 31-year low against the dollar hitting $1.31.
Commercial property, which as a sector is down by -15.2 per cent since the vote, has been the biggest loser in the Brexit aftermath, followed by general retailers, down by 11.4 per cent, and banks which are 10 per cent weaker.
Pharmaceuticals have been the big winner, up by 13.5 per cent followed by other big overseas earners such as tobacco, oil and gas and mining, all up by over 10 per cent as sterling has sold off.
Rowan Dartington Signature’s Guy Stephens says Mark Carney announcing that he is considering further monetary stimulus over the summer had further supported the FTSE.
“The equity market interpreted this as meaning that interest rate cuts and possibly additional quantitative easing could be due and that means recycled investor cash into risk assets, such as equities,” Stephens says.
In the press conference, Carney also said the FPC was still considering the consequences of changing interest rates. The Bank has also promised further intervention if needed.
Its report says: “The FPC stands ready to take actions that will ensure that capital and liquidity buffers can be drawn on as needed, to support the supply of credit and in support of market functioning.”
Carney said he would defer any forecasts of a technical recession to the monetary policy committee, which will meet later this month, but says changes in demand for real estate and business investment that have been seen already suggest a slowing economy.
The financial stability report says Brexit economic risks have already “begun to crystallise”.
It says: “The current outlook for UK financial stability is challenging. There will be a period of uncertainty and adjustment following the result of the referendum. It will take time for the UK to establish new relationships with the European Union and the rest of the world. Some market and economic volatility is to be expected as this process unfolds.”
The report says vulnerable households are a possible risk to the health of the UK economy.
It argues restrictions imposed by the Financial Policy Committee on mortgage underwriting have curbed levels of UK household debt.
But it adds: “However, the ability of some households to service their debts would be challenged by a period of weaker employment and income growth.
“These vulnerable households could affect broader economic activity by cutting back sharply on expenditure in order to continue to service debts.”