Bank of England warns of EU referendum risks

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UK and EU flags flyingImage source, Reuters

The Bank of England's Financial Policy Committee (FPC) says that the outlook for financial stability has deteriorated since November.

In a statement, the committee said what it called - "the most significant near-term domestic risks to financial stability" - were connected to the referendum on European Union membership.

The FPC refers to risks associated with a period of "heightened and prolonged uncertainty".

It doesn't say explicitly that it has in mind the period after a vote in favour of leaving the EU, but that is most likely what it has in mind.

The result of that uncertainty, the committee judges, could "affect the cost and availability of financing for a broad range of UK borrowers".

These pressures could, the FPC says, reinforce existing vulnerabilities.

The UK's current account deficit (that's the trade in goods and services plus some financial transactions) remains high, and it needs to be financed by foreign investment.

Those flows have contributed to meeting the borrowing needs of the government and business, the statement says.

The Bank also says a decision to withdraw "could spill over to the euro area", affecting financial markets and economic growth there.

It also notes that sterling could be forced lower, though that has potential benefits - making British industry more competitive and raising the cost of imports, which would arguably be welcome at a time when inflation is well below the Bank's target.

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