Underinvestment in UK may be result of persistent risk aversion, BoE's Cunliffe says

The Great Financial Crisis may have led not only to higher uncertainty which continued to linger but to a long-term increase in the level of risk aversion among businesses as well, a top UK rate-setter said.

In remarks prepared for a speech at the Greater Birmingham Chamber of Commerce, Sir Jon Cunliffe, the Bank of England's Deputy Governor, Financial Stability said: "Academic literature suggests that experience of adverse events can affect future risk-taking behaviour. There is evidence that individuals who experienced the Great Depression reported lower willingness to take financial risk throughout their lives."

That, Cunliffe said, was a plausible explanation for then currently "high" levels of 'hurdle' rates, relative to the so-called risk-free rate, for companies looking to invest.

"This higher hurdle rate risk premium is in addition to the higher debt and equity risk premia embodied in the cost of external financing of investment. It may have led to underinvestment more generally, even among those firms that reported that they had invested appropriately," he said.

How persistent, or not, the hurdle rate premium and greater risk aversion would prove to be in future would have important consequences for rates of investment in the UK.

In his opinion, "ultimately, the outlook for business investment, like the outlook for the economy more generally over the forecast period, depends largely on how households and businesses react to Brexit and on the process that accompanies it."

As of 1345 GMT the yield on the benchmark 10-year Gilt was down by five basis points to 1.237%, a smidgen below the 1.239% level they were occupying at the end of 2016.