Bank of England to keep close eye on UK current account deficit

[April 07, 2015]  By Huw Jones and Andy Bruce

LONDON (Reuters) - Britain's large current account deficit could damage market sentiment towards the country if the economic environment deteriorates, the Bank of England said on Tuesday.

Minutes from the BoE's Financial Policy Committee meeting on March 24 showed members were worried about Britain's current account deficit, noting it was high by historical standards.

"(The) current account deficit was large and could, in adverse circumstances, trigger the deterioration in market sentiment towards the United Kingdom," the minutes said.

The deficit narrowed as a percentage of the economy in the fourth quarter after matching its record high in the previous three months. But for 2014 as a whole, the shortfall widened to 5.5 percent of GDP, the largest deficit since records began in 1948.

"The committee agreed to keep their assessment of this risk under close review and would monitor the maturity and liquidity of the financing of the deficit."
 

FPC members said "fragile" market liquidity was also a concern, although there was a range of views on its causes, hinting at the arguments currently being aired in the wider financial sector.

Banks have blamed a welter of new capital rules for making market-making less profitable. Regulators have so far been cautious about endorsing such arguments in public.

The FPC cited a decline in market-making activities at some financial firms.

"It was also noted that these developments had reflected, in part, changes in the regulatory framework designed to make institutions more resilient although pre-crisis levels of liquidity had not been available in times of stress," the FPC said.

Regulators will report to the FPC, initially in June, on why liquidity has become fragile so that the committee can consider responses.

The committee said Britain's banks had low exposures to Greece, which is in the midst of negotiating with its euro zone partners to resolve a funding squeeze.

"Nevertheless, the committee judged that, were Greece and its euro area partners to be unable to reach an agreement, more significant effects could arise."

Given the risks regarding Greece and the euro zone, BoE staff had been working closely with the finance ministry and the Financial Conduct Authority to ensure that contingency plans were in place, the FPC said.

(Reporting by Huw Jones and Andy Bruce; Editing by Larry King)

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