Market stress could return, UK finance industry warns BoE

July 9, 2020

LONDON (Reuters) – Stress in financial markets could yet make a comeback, Britain’s finance industry warned the Bank of England last month, with Brexit and global political risks auguring for a difficult end to the year.

Minutes published on Thursday from a June 2 meeting of the BoE’s UK Money Markets Committee (MMC), which includes major banks, showed unease about a possible repeat of market chaos that struck in March when the COVID-19 pandemic escalated.

“While it was clear that liquidity had now returned… some members were more pessimistic about the potential recovery and noted the potential for stress to return,” the minutes said.

In March, a frenzied “dash for cash” prompted investors who were normally willing to buy safe assets such as British government bonds to swap them for money held with central banks.

BoE Governor Andrew Bailey has said there was a risk that Britain’s government would have struggled to raise money without the central bank’s intervention to calm the market.

Minutes from the BoE’s June MMC meeting also hinted at nerves about the end of the government’s job-protecting furlough scheme, which is due to shut at the end of October.

“It was noted that this, in conjunction with Brexit and geopolitical risks, could make year-end challenging,” the minutes said.

The world’s sixth-biggest economy shrank by 25% in March and April and could be heading for its biggest fall in 300 years in 2020, with the unemployment rate on course to more than double to about 10%, according to official projections.

Under a new bonus plan announced by finance minister Rishi Sunak on Wednesday, employers will be paid 1,000 pounds ($1,256) after the furlough scheme expires for every worker who returns to their job, provided they are kept on through to the end of January.

The BoE also published minutes from an extraordinary MMC meeting on March 18, around the height of the market tensions, which showed worry about the pressure heaped on banks.

“The banking sector was facing significant balance sheet constraints, in part as a consequence of corporates drawing down on, or expected to draw down on, revolving credit facilities (RCFs),” the minutes said.

Some MMC members also asked the BoE if had planned to expand its emergency funding scheme for large companies – the Covid Commercial Financing Facility – to include the financial sector.

(Reporting by Andy Bruce; Editing by Toby Chopra)