Image: Alex Guibord
Image: Alex Guibord

The Bank of England has today (Tuesday) warned that a decision to leave the European Union poses significant risks to the UK that could spark another credit crunch.

In its first official report on the EU referendum debate, the Bank’s Financial Policy Committee (FPC) said a Brexit could result in rising borrowing costs for businesses and consumers, and weaken the sterling.

In a statement, the FPC said: “Looking ahead, heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wider range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers.”

Explaining the possibility of another credit crunch, it added: “The financing of that deficit is reliant on continuing material inflows of portfolio and foreign direct investment. Those flows have contributed to the financing of the public sector financial deficit and corporate investment, including in commercial real estate. Heightened uncertainty could test the capacity of core funding markets at a time when the liquidity of these markets has shown signs of fragility across advanced economies.”

The FPC said the outlook for financial stability in the UK has worsened since it last delivered a quarterly report in November, adding that “domestic risks have been supplemented by risks around the EU referendum”.

Buy-to-let clamp down

The Bank of England has also imposed tighter lending restrictions on those wishing to buy properties to rent.

The Bank has kept a close eye on the buy-to-let mortgage market over the past year, placing on it a large portion of the blame for a lack of available properties.

And with new taxes on buy-to-let mortgages, the Bank of England wants banks to carry out stricter tests on prospective mortgage holders. It wants banks to ensure that borrowers can meet all costs, including extra taxes and repayments based on interest rates of 5.5%.