Big Problem Is Growth

The Governor of the Bank of England has a one-word wish list for the new PM: growth. He says the UK has been stuck in low gear for 17 years and banks can and must help fix it.

The UK economy has been crawling along for nearly two decades since the banking crisis of 2008 and the Bank of England has just fired a warning shot at Andy Burnham as he prepares to take over in Downing Street: “The big issue is growth in the economy.” In other words: Britain needs to get moving fast.

BAILEY DEFENDS REGULATION

The Bank boos Andrew Bailey pushed back against claims that strict banking rules are holding Britain back, insisting that stability comes first and that “We will not get growth if we do not have financial stability.”

He admitted regulation can evolve but rejected the idea that banks are sitting on a “lump of capital” they can’t use. His message is that Banks are strong enough to lend and strong enough to help rebuild the economy.

BANKS ARE MAKING BIG MONEY

With interest rates high and profits booming, Lloyds and NatWest have already upgraded their income targets this year. Some want Burnham to slap a windfall tax on the sector, but Bailey says it’s up to the banks to decide whether to: “Reinvest earnings into their own business or pay them back to shareholders.” In other words, he is saying the Banks have the cash and now they need to decide whether to help Britain grow or to reward investors.

CAPITAL RULES TO BE SIMPLIFIED

Earlier this year, the Bank’s Financial Policy Committee announced plans to simplify capital requirements, freeing up more capacity for lending to households and businesses.

Capital rules decide how much money banks must hold to absorb and future losses should something like the banking crisis hit again. Looser rules mean there is more money available for lending but only if banks choose to do so.

The move follows heavy lobbying from the banking sector, which claims regulation has become “excessively conservative” and is hurting competitiveness.

GLOBAL PRESSURES

Andrew Bailey also warned that interest rates will stay higher for longer because of global shocks, especially the war in the Middle East, which sent oil prices soaring past $120 and reignited inflation fears. Higher rates mean:

• higher borrowing costs

• higher mortgage payments

• higher business finance costs

meaning more pressure on the Government to deliver growth without fuelling inflation.

The Bank of England has delivered its message loud and clear:

• Britain has been stuck in low growth for nearly two decades

• Burnham’s biggest job is to get the economy moving

• Banks are strong enough to lend but must choose to

• Regulation can evolve, but stability comes first

• Global shocks mean interest rates won’t fall quickly

Small and micro businesses will be watching closely. Because if Burnham can’t unlock growth, they’ll be the first to feel the squeeze, again.