The UK’s giant current account deficit unlikely to create extra risk in the run up to EU referendum, says Bank of England’s Kristin Forbes.
A top Bank of England official has said the UK's large current account deficit helps to share risk, as well as create it, in the face of domestic uncertainty.
The current account deficit hit 5.1 per cent of GDP in 2014, the largest in 60 years of comparable records. It is the amount the UK imports over what it exports, but also includes the net income earned on assets overseas.
Current account deficits have to be financed, either by selling assets to foreigners or borrowing from abroad. If a country is suddenly unable to finance its current account deficit, it results in a sharp drop in the value of the currency followed by a short period of economic turmoil. But Kristin Forbes, a member of the Bank of England's monetary policy committee, said the UK faced less risk.
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"Sterling tends to depreciate during periods of heightened UK and global risk, and the interactions of weaker sterling with the UK’s international asset and liability positions can generate improvements in the UK’s international investment position and current account – even without any adjustment in trade," she told an audience at the Official Monetary and Financial Institutions Forum in London today.
"This automatic risk sharing tends to be larger during periods of heightened UK risk than after periods of heightened global risk, although it is unlikely that this situation could persist for an extended period of heightened UK uncertainty."
"Heightened domestic risk could reflect any increased uncertainty about the evolution of the UK economy or anything that makes UK consumers, businesses and investors in the UK more 'risk averse', including uncertainty in the run-up to any election or referendum."
However, she said any risk sharing elements from the current account are unlikely to offset overall negative impacts on the economy from uncertainty.
"This should not be taken to suggest that heightened domestic risk does not present any concerns for the broader UK economy.”
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“Perhaps most important, the estimated magnitude of this potential risk sharing through international exposures is moderate and would be unlikely to fully counteract the many negative effects from increased uncertainty on the broader UK economy.”
The UK's suffered a so-called balance of payments crisis during the Suez Crisis in 1956, when international investors lost confidence in British assets, namely government debt. East Asia also suffered one in 1997. They tend only to occur when a country attempts to fix its currency's exchange rate.
