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FPC Record of November Meeting Signal Emerging Markets Risk

FPC Record of November Meeting Signal Emerging Markets Risk

Oded Shimoni, Junior Currency Analyst

Talking Points:

  • Emerging markets risks are in sharper focus
  • Market reaction to any decision by the FOMC is difficult to predict
  • Downside risk to Euro-area remain

The BoE’s Financial Policy Committee (FPC) meeting record released today emphasized emerging markets risks to the UK’s economy. The responsibility of the committee is mainly to identify systemic risks in order to protect the UK’s economy. The Committee met on November 25 to form its outlook for financial stability in order to decide on the proper policy in light of the risks identified.

The FPC remarked that they made no new recommendations, and that the prior reccomendations relating to stress testing had been implemented. The committee identified the main risks facing the financial system in the United Kingdom as emerging market economies (EMEs); financial market fragility; property markets in the United Kingdom; United Kingdom’s current account deficit; and cyber risk. The countercyclical capital buffer rate for UK exposures was set at 0%.

Highlights from the record:

  • Risks in relation to emerging market economies are in sharper focus due to slowing activity in Q2. Specifically, risks to UK financial stability is associated with possible build-up in emerging market debt.
  • China outlook for growth remained unchanged because of monetary and fiscal stimulus.
  • November saw net outflows from EME’s, presumably due to market expectations for an increase in the US Federal Funds rate.
  • Market reaction to any decision by the FOMC to increase interest rates remains difficult to predict.
  • Downside risk to Euro-area remain, partly due to strong trade links with EMEs.
  • Market liquidity risks are not being fully reflected in the prices of some financial assets.
  • Current account deficit in the UK could lead to a sudden adjustment in capital flows or a depreciation of the exchange rate, with adverse consequences for UK financial stability.
  • Resilience of the UK’s banking system continues to strengthen, reflecting the introduction of higher regulatory requirements. The banking system would have the capacity to maintain its core functions in a stress scenario such as the one in the 2015 stress test.

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