“Investment and the Duration of Uncertainty: Option Value of Waiting”
Dr Ben Broadbent, Deputy Governor Bank of England
May 20th, 2019
Our CCB Executive students were welcomed yesterday afternoon (Monday, May 20th) at the Imperial College Business School to attend a talk by Deputy Governor of the Bank of England, Dr Ben Broadbent on the topic of Investment. The event was organised by The Brevan Howard Centre for Financial Analysis at Imperial College Business School.
Dr Ben Broadbent became Deputy Governor on 1 July 2014. Prior to that, he was an external member of the Monetary Policy Committee from 1 June 2011. In addition to his membership of the Monetary Policy Committee, Financial Policy Committee and Prudential Regulation Committee, he has specific responsibility within the Bank for Monetary Policy, including monetary analysis and notes and shared responsibility for the Bank’s International macroeconomic analysis, strategy and engagement.
The Dean of the Business School, Professor Francisco Veloso, extended his warm welcome to all in attendance and illustrated how key this talk would be in the discussion surrounding the most cutting-edge monetary policy and Fintech. Professor Veloso has been the Dean of The Imperial College Business School since 2017 is a leading authority in Innovation and Entrepreneurship, whose research has focussed on how firms and regions develop and leverage science and technology for economic growth.
Dr Broadbent discussed a number of significant points when discussion investment in line with uncertainty including the value of waiting for news during times of uncertainty and how much that impacts on the likeliness firms to invest.
Businesses invest less when uncertainty is high. The current impact of Brexit on UK businesses is uncertainty, so that Brexit becomes one of three major sources of risk for business in the UK at present. Most UK firms say output and employment would fall in a no deal, no-transition Brexit and this would, obviously, be not a welcome development in the UK economy. Dr Broadbent discussed how recent investment has been weaker than in previous expansions and how investment growth is unusually weak relative to employment growth.
Dr Broadbent also mentioned how important the expected duration is of the period of uncertainty and that the current reduction in investment has been driven by firms that expect a result soon. An increase in uncertainty generally boosts employment relative to investment and the required rate of return for UK firms has risen even as risk-free yields have fallen. Finally, Dr Broadbent made the point that the combination of rising profit margins, falling investment growth suggests significant increases in risk premium.
Dr Broadbent closed by suggesting that the majority of firms can probably afford to wait to see what happens regarding Brexit. What matters in the meantime is the perception of what could happen, and this is the factor that will press on investment. As soon as you expect news in the immediate future – the impact on uncertainty will be higher.
This was an incredibly insightful and thought-provoking talk for our CCB Executives as they got a real look into the key topics that are on the minds of the top economists in the country, specifically regarding Brexit and what UK firms can be expected to do concerning investments now and in the near future as the Brexit process continues to develop.
Thank you to Dr Broadbent for an engaging talk and to the Imperial College Business School for extending the invitation to our PHBS UK CCB Executive students!
(Report by Zoë Toone. Edited by Guy Liu. Photo by Joël McConnell.)
|Last modified: 2019-05-21 07:30:37 by Zoe Toone||Created at: 2019-05-21 07:11:44|