BoE to watch BoP risk from EU vote

THE Bank of England will monitor the risk that Britain’s European Union membership referendum could make it harder for the country to finance its large current account deficit, a top official at the central bank said. Ben Broadbent, ( pictured) a deputy governor at the BoE, said it was clear that the decision by British Prime Minister David Cameron to hold the in-out vote created some uncertainty.

“This is a political decision to hold this, so I am not going to suggest that the effects on investment or the uncertainty about the outcome are reasons you should not do it at all,” Broadbent said in an interview late on Wednesday.

“It’s clear that in an open economy like this one, particularly one which happens to have at the moment a large current account deficit, inflows of FDI (foreign direct investment) and portfolio investment are an important, stable way of financing that,” Broadbent said.

“So that would be the risk we would be monitoring.”

Britain’s current account deficit was at its widest on record in 2014 at nearly 6 per cent of gross domestic product, pushed up not only by its trade deficit but also by low returns on its foreign investments while investments in Britain generated stronger returns for foreign investors.

Cameron has pledged to hold the vote on whether Britain should remain in the EU before the end of 2017, and is seeking to secure reforms of the bloc before then.

Opinion polls have mostly shown more people in Britain favour staying in the EU than leaving.

But business leaders, most of whom also support Britain’s membership, say uncertainty could hurt investment in the run-up to the vote.

Broadbent said the BoE would stick to its focus on achieving 2 per cent inflation in order to ensure a stable environment for investors and business.

“What is important is the credibility of policy and financing that (current account) deficit is a lot harder as we found in the 70s and 80s, a lot harder, a lot more expensive and sometimes very difficult at all, if people think you don’t have credible macroeconomic policy,” he said.

“Certainly the uncertainty created by the referendum may matter, it is something we will monitor. But for our part what we have to do is ensure that we continue to set policy in order to hit a stable inflation objective.”

BoE Governor Mark Carney said in May that there was no sign that businesses were putting off investment decisions because of uncertainty over the referendum but that it was important to be clear about how the process will proceed.