25  All speeches are available online at www.bankofengland.co.uk/news/speeches  25  When there is an economic shock, the FPC can release the CCyB to 0%, reducing banks’ capital requirements. This frees up capital to absorb losses and preserve lending capacity. By continuing to lend, banks help to cushion the economic shock, and promote a quicker economic recovery. That is, the ability to cut the CCyB reduces GDP-at-risk, improving overall welfare.27 To give you some idea of scale, a cut in the CCyB from 2% to 0% today would preserve banks’ capacity to lend to UK households and businesses by £ By comparison, net lending was around £ over the past year. This is a stark departure from the pre-crisis framework. Banks’ capital requirements were determined by microprudential supervisors focussed on the safety of individual institutions. When shocks hit, this incentive created by a purely microprudential objective was more likely to motivate supervisors to conserve capital at all costs, with the consequence that banks restricted lending and exacerbated the macroeconomic downturn. The CCyB also supports the central GDP forecast by ensuring banks do not have to carry at all times sufficient capital for an elevated risk environment, with the associated knock-on to borrowing costs, investment, and output. For example, Bank of England work suggests that - had the current capital framework been in place before the crisis - the CCyB would need to have been between 3.5% and 5% to absorb losses.
On the credit market, growth in mortgage lending is slowly receding, with the current rate of increase below 5%. The “other loans” category continues to expand rapidly, while matching observations of the past in comparable phases of the economic cycle. This category is now growing at a rate of about 8– 10%, as at the beginning of the 2000s, when their level in fact considerably exceeded the levels we are currently experiencing. M1 and M2 shrank, which is nothing out of the ordinary during a phase of rising interest rates. When this happens, savings and sight deposits are shifted into time deposits. M1 and M2 are affected by this substitution. M3, which is not affected, is growing at a rate of 2% to 3%, which is appropriate for an expanding economy. Inflationary risks In the current environment, price stability is subject to three types of risk: The first risk is connected with the development in the price of oil. The barrel price for Brent crude rose by 40%, from USD 51.0 in January to USD 71.7 in May. This will lead to higher inflation during the course of the year. Unlike oil price hikes between 2004 and 2006, the most recent rally took place when capacity utilisation was higher. If the current surge in oil prices were to continue, it could affect prices more easily than previously. The second risk is due to the fact that demand is growing at too rapid a pace in relation to the development in production capacity.