Financial stability post Brexit: risks from global debt Speech given by Sir Jon Cunliffe, Deputy Governor for Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee  CFO Agenda, London Tuesday 7 May 2019  1  All speeches are available online at www.bankofengland.co.uk/speeches  Thank you for inviting me in January to speak today at your conference on “Financial Stability Post Brexit”. I suspect that when this subject was chosen and the invitation sent, it was assumed that Brexit itself would have happened by the time of the conference. As it is, not only has Brexit not occurred, but the path to it and its eventual outcome are perhaps less clear now than a few months ago. So it is perhaps worth spending a little time today on the financial stability risks that might arise from Brexit. I will then go on to examine the financial stability risk environment more generally. Before going further, a health warning is necessary. It cannot be repeated too often that the Bank’s approach to its financial stability objective is, in one key respect, very different to its approach to its monetary stability objective. For the latter, the Monetary Policy Committee makes the best forecast we can of the path of the economy and the path of inflation – the central case.
The MPC published analysis last August suggesting that the trend real rate in the UK has fallen by more than 2pp since 1990. Slower population growth, increased life expectancy and slower productivity growth have all contributed to this fall.9 Looking forward, many of the structural factors currently weighing on the trend real rate – in particular, changes in demographics – are likely to persist for many years to come, though other factors could push in the opposite direction.10  The trend real rate of interest, however, cannot be observed directly. It can only be estimated and while most estimates suggest it has reduced materially, estimates do vary widely. See August 2018 Inflation Report. See also ‘Secular drivers of the global real interest rate’ by Lukasz Rachel and Thomas D Smith (Bank of England Staff Working Paper No. 571). 10 For example, increasing financial integration of lower-income countries, a pickup in overall global productivity growth and increasing automation. 9  7  All speeches are available online at www.bankofengland.co.uk/speeches  7  As to income growth, to the extent that expected low real rates reflect expected lower productivity and hence expected lower income growth, they would not make debt more sustainable. Over the economic cycle, of course, the short-term real rate of interest will be moved around its longer-term trend by more temporary factors. But the persistence of the fall in the trend real rate means interest rates are likely to need to remain low by historical standards for some time to come.