Market stress could return, UK finance industry warns BoE

LONDON (Reuters) – The stress on the financial markets could still make a comeback. The UK financial industry warned the Bank of England last month. Brexit and global political risks are facing a difficult year-end.

FILE PHOTO: A security guard stands in front of the Bank of England in London, UK on March 23, 2020. REUTERS / Toby Melville

The minutes of a BoE UK Money Markets Committee (MMC) meeting on June 2, which included large banks, released on Thursday showed concern over a possible repetition of the market chaos that occurred in March when the COVID-19 pandemic escalated .

"While it was clear that liquidity had now returned … some members were more pessimistic about the possible recovery and found that stress may return," the minutes said.

In March, a raging dash for cash prompted investors who were usually willing to buy safe assets, such as British government bonds, to exchange them for money held with central banks.

BoE governor Andrew Bailey said there is a risk that the UK government would have had difficulty raising money without the central bank's intervention to calm the market.

The minutes of the BoE MMC meeting in June also indicated that the government's job-saving vacation program was to be discontinued at the end of October.

"It was found that this, combined with Brexit and geopolitical risks, could challenge the end of the year," the protocol said.

The sixth largest economy in the world shrank 25% in March and April and could head towards its largest decline in 300 years in 2020, with official unemployment forecasting that the unemployment rate will more than double to around 10%.

As part of a new bonus plan announced by Treasury Secretary Rishi Sunak on Wednesday, employers will receive £ 1,000 ($ 1,256) after the holiday program ends for each worker who returns to work if it continues until the end of January.

The BoE also published minutes of an extraordinary MMC meeting on March 18, which was at the height of market tensions and showed concern over the pressure on the banks.

"The banking sector faced significant balance sheet constraints, in part due to companies taking or likely to use revolving credit facilities (RCFs)," the minutes said.

Some MMC members also asked the BoE whether they had planned to extend their large corporate emergency financing program – the Covid Commercial Financing Facility – to the financial sector.

Reporting by Andy Bruce; Arrangement by Toby Chopra

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