Bank fears huge UK deficit could spark panic

THE Bank of England has warned that the UK’s £98bn current account deficit could trigger panic in the markets if the economy deteriorates.

Minutes of the Bank’s Financial Policy Committee meeting held on March 24 showed that its members discussed the danger posed by the deficit.

The current account balance – the difference between money generated by the UK and money paid out from exports and imports as well as investments – was more than half as big as expected in the final three months of last year, hitting £25.3bn, or 5.6pc of the economy.

This marked a fall from the third quarter when it stood at just over 6pc or £27.7bn.

The FPC, set up to spot and act on risks to the UK’s financial stability, noted this was ‘high by historical standards’.

It said if investors remained confident in the economy then the deficit would be easier to finance.

But it cautioned: ‘That said, the current account deficit was large and could, in adverse circumstances, trigger a deterioration in market sentiment towards the United Kingdom.’

It said the committee agreed to ‘keep the assessment of this risk under close review.’

This echoes a warning from the world’s largest fund manager BlackRock earlier this month.

The US giant said the UK cannot afford a loss of confidence because its ‘gaping current account and budget deficits’ make it ‘particularly reliant on the kindness of strangers’ – overseas lenders – to keep it afloat.

Analysts have raised concerns that perceptions of the UK’s creditworthiness may be hit by political uncertainty.

Two scenarios are seen as particularly worrying: a referendum on a British exit from the European Union that has been promised by David Cameron, and the possibility of a Labour administration that is dependent on the SNP, which is openly hostile to austerity.