However, my main point is that, given all the moving parts, even the marginal impact of EU withdrawal on the appropriate level of UK interest rates is ambiguous. As the MPC said ahead of the referendum, in May 2016, the impact of a leave vote on monetary policy would depend on what it did to “demand, supply and the exchange rate”. These pull in different directions: holding fixed the other two, weaker demand tends to depress inflation and interest rates, declines in productivity and the exchange rate do the opposite. There are feasible combinations of the three that might require looser policy, others that lead to tighter policy. You might say this is true at any time. “Demand, supply and the exchange rate” can always move around and it’s not as if monetary policy makers can ever afford to ignore any of them. The MPC is always having to think very carefully about the forces on aggregate spending; it generally has to form some sort of view about underlying supply growth; it must always take into account the latest moves in exchange rates and other asset prices. Furthermore, in the normal course of events these three things do not move independently of each other. It’s usually not valid to vary only one and imagine the others will stay constant. Exchange rates are volatile but, over time, they often move because of news about domestic demand (Chart 2 plots smoothed series for sterling’s real exchange rate and the growth of domestic demand).
Combining the three core businesses of retail banking, specialised financial services and corporate and investment banking helps to open up opportunities for cross-selling, and reduces banks’ sensitivity to the interest rate cycle by giving them access to more diverse sources of financing. Even in retail banking, profitability has been better preserved thanks to the increase in fees on activities that are not linked to interest rates: payment services, asset management and insurance investments. For the six largest French banks, net interest margin thus accounts for 44% of net income compared with 57% for their euro area peers. The challenge of bank profitability also raises another imperative: cross-border consolidation, which would allow genuine pan-European banking groups to carry out their activities more efficiently and better withstand the international competition. Compared with the US market, the European banking sector remains fragmented: the 5 main European banks have a market share of just 20% compared with more than 40% for their US peers. Meeting this target is in part the responsibility of public authorities: concrete progress finally needs to be made on the Capital Markets Union, and the Banking Union needs to be completed in a true single banking market. It is particularly important to prevent geographical ring-fencing practices, which stop groups from managing liquidity and capital on a consolidated basis. These policies could prove dangerous in the event of a crisis as they would make it harder for entities within cross-border groups to support each other.