Flash Crash Of Pound: Challenges For Central Bank

Even though interest rates remain low at 0.25% and liquidity remains ample, the Credit Conditions Survey for 2016 Q3 released by the Bank of England highlights that secured lending for house purchase both for prime lending and buy to let have fell significantly. Analyzing from the perspectives of banks, the uncertainty is compounded furthermore. With news that the government is on course to undertake a ‘hard‘ brexit (departure from the single market and the European customs union), banks also face the added uncertainty of whether they would remain in London or stationed elsewhere in Europe. In this scenario if the subdued demand for loans continues, then banks would invest their funds in risk free government securities, popularly known as the ‘lazy banking‘ model in academic literature. Experience from other countries narrates that if ‘lazy banking’ kicks in then it is difficult to reverse it and can pose a big challenge for central banks to give boost to the economy. Hence, a depreciating sterling does not only hold the risk of portfolio rebalancing by investors in favor of non sterling currencies but also hypothetically by banks in favor of government securities.

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