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Current account deficit 'monitored'

Published 07/04/2015

The Bank of England 'is monitoring' the country's current account deficit
The Bank of England 'is monitoring' the country's current account deficit

Britain's swollen current account deficit will be kept "under close review" by the Bank of England amid fears it could risk investors turning against the country.

A record of the Bank's latest Financial Policy Committee (FPC) meeting highlighted the deficit among a list of key risks facing the UK economy.

It added that risks from UK housing and household debt had not increased, but noted the increasing share of interest-only mortgages in buy-to-let mortgage lending.

Latest figures from the Office for National Statistics (ONS) showed the current account deficit swelled to a record 5.5% of gross domestic product (GDP) last year, the highest annual percentage level since records began in 1948.

The current account deficit includes the gap between imports and exports as well as the difference between UK earnings on investment abroad and foreign earnings on investment in the UK.

In the third quarter it was £27.7 billion, or 6.1%, of GDP, though it narrowed to £25.3 billion, or 5.6%, in the last three months of 2014.

The FPC noted that the scale of the deficit in the third quarter was "high by historical standards in the United Kingdom and elsewhere".

Investors' view of Government spending plans, interest rate policy and broader economic plans would help, but in a tough climate they could turn against the UK, the committee warned.

It said: "To the extent that fiscal policy was credible and investors were confident in the monetary and fiscal policy frameworks and the United Kingdom's continuing openness, current account deficits would be easier to finance.

"That said, the current account deficit was large and could, in adverse circumstances, trigger a deterioration in market sentiment towards the United Kingdom.

"The committee agreed to keep their assessment of this risk under close review and would monitor the maturity and liquidity of the financing of the deficit."

The FPC also reviewed risks stemming from the UK housing market - described last year by deputy governor Sir Jon Cunliffe as the "brightest light on the dashboard" of "blinking warning lights" - as well as household debt.

It said these had not increased, but added that household debt remained high while "insurance" it had put in place last year - when it announced curbs on riskier mortgage lending - remained warranted.

The committee added that it "noted the increasing share of interest-only mortgages in buy-to-let mortgage lending and agreed to continue to monitor developments closely".

Regulators have previously warned that interest-only mortgages have created a "ticking time bomb" as terms expire in coming years and borrowers face having to pay off their mortgage capital.

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