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Weaker finance flows could deepen UK current account woes: BoE's Forbes

[LONDON] The slowdown in global financial flows since the 2008-09 crisis could make it harder to fund Britain's vast current account deficit, although a 1960s-style currency crisis is unlikely, a Bank of England official said on Tuesday.

Kristin Forbes, one of the Bank's nine interest rate-setters, said cross-border financial flows had declined sharply after the banking system's near collapse seven years ago and were nowhere near returning to pre-crisis levels.

This could have several implications for Britain's economy, given its position as an international finance hub, she said. "A reduction in international bank flows could make it more difficult, and possibly even more expensive, for the UK to fund its current account deficit," said Forbes, speaking at Queen Mary University in London.

Britain's current account deficit stood at 5.2 per cent of gross domestic product in the second quarter of this year, not far from its record of 5.6 per cent in the third quarter of 2013.

Forbes said it was unlikely the deficit would fall in the near future, given weaker demand from Britain's trading partners.

Net international bank flows, an important source of funding since the crisis as banks retrenched from foreign exposure, fell sharply in 2013, which could leave Britain "increasingly dependent" on other forms of financing, she said. "A foreign exchange crisis as occurred in the era of the Beatles is unlikely, however, due to changes such as the move to a flexible exchange rate," said Forbes, who referred to the rock band several times in her speech.

Britain's government was forced to devalue sterling in 1967 by 14 per cent against other currencies, before the pound became a free-floating currency four years later.

In July, BoE Deputy Governor Ben Broadbent said Britain's large current account deficit does not pose "an existential threat" to the country's recovering economy.

Forbes also said the reduction in financial globalisation could make Britain less vulnerable to shocks from abroad but make it more prone to domestic shocks. "As UK banks lend less abroad, and foreign banks lend less in the UK, the total UK credit supply will be more tightly linked to the domestic supply of credit and business cycle," she said.