This morning I attended the Bank of England breakfast briefing with Sir Mervyn King, the current Governor of the Bank of England.
The Governor commented that he believed the UK was beginning to recover, albeit with two significant challenges facing the economy. The first was the need to return the UK’s banking system to a healthy one that is sufficiently robust and sea worthy. Sir Mervyn commented that in his view it could be possible for the UK to have the banks sorted by the end of 2014. He also commented that he was concerned about the banks under state ownership, namely RBS and Lloyds.
The second challenge is the economic situation in the Eurozone. Despite the UK, in his view, having sound strategies in place for dealing with the after effects of the financial crisis, the problems outside of the UK are not within the control of UK policy makers. He commented that the uncertainty surrounding Europe is like a big black cloud which is resulting in a lack of confidence from investors and bankers. The large exposure that the UK banks have to European debt was also still of some concern.
Sir Mervyn went on to say that the Funding for Lending scheme had been extended through to 2014 with the aim of supporting banks to lend, although he did go on to say that this was not going to be a game changer. Our experience at Armstrong Watson is that we are not seeing the Funding for Lending scheme making any real difference on the ground, certainly not in the SME market. If anything we have noticed that some banks are simply using the scheme to renew their existing facilities, although the client benefits from no up front fee. The Governor commented that the banks still have some way to go to sort out their balance sheets and are dealing with their legacy problems from lending that took place prior to the financial crisis through reducing the scale of their lending. The black cloud of uncertainty surrounding Europe is also making the banks nervous, resulting in them becoming risk adverse. This is why they have been pumping money in to the system through Quantitative Easing as the banks take money out of the financial system.
When the recovery comes he was confident that the bank will not let inflation pick up when Quantitative Easing stops. He also believes that the levels of growth in 2007 were sustainable as they were at the average level for the previous fifty years, but it will take 20 years to return to these levels of growth.
With regard to interest rates he commented that after inflation rates are negative. This is of particular concern for savers and investors which has resulted in them looking else where. Sir Mervyn commented that, from a market perspective, they are of the view that the bank rate will not increase before 2016. He would be happier if we could get back to real interest rates, so that after inflation, investors receive a positive return.
When questioned about the stock market performance, Sir Mervyn commented that markets do tend to pick up before the real economy does. He suggested that the fall in interest rates and the perceived further falls have increased asset prices.
Paul Dickson, Managing Partner
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