There was a reason why we warned readers two days ago that “The World’s Central Bankers Are Gathering At The BIS’ Basel Tower Ahead Of The Brexit Result“: simply enough, it was to facilitate an immediate response when a worst-cased Brexit vote hit. And that is precisely what has happened today in the aftermath of the historic British decision to exit the EU.
It started, as one would expect, with Mark Carney who said the Bank of England is ready to pump billions of pounds into the financial system as he stands at the front line of Britain’s defense against a Brexit-provoked market crisis. The BOE governor declared that the central bank can provide an extra 250 billion pounds ($345 billion) through its existing facilities. It also has further measures if needed to deal with what he described as a “period of uncertainty and adjustment” after Britons voted to end their 43-year membership of the world’s largest single market.
The pound plunged to a three-decade low, British and global stocks tumbled and European bond spreads widened as the Brexit vote unfolded on Friday. Investor bets on a July interest-rate cut rose and Standard & Poor’s said the U.K. will lose its top credit rating.
“Some market and economic volatility can be expected as this process unfolds,” Carney said in a televised statement in London after the referendum result. His comments followed Prime Minister David Cameron’s announcement that he will step down this year, which will inject political uncertainty into an already volatile period. His full announcement is below and his statement can be found here:
More from the central bank governor who is now scrambling to undo all the scaremongering he had unleashed to prevent precisely this outcome:
But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning. The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward.
These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years. The capital requirements of our largest banks are now ten times higher than before the crisis.
The Bank of England has stress tested them against scenarios more severe than the country currently faces. As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.
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In the coming weeks, the Bank will assess economic conditions and will consider any additional policy responses.
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A few months ago, the Bank judged that the risks around the referendum were the most significant, near-term domestic risks to financial stability.
To mitigate them, the Bank of England has put in place extensive contingency plans.
These begin with ensuring that the core of our financial system is well-capitalised, liquid and strong. This resilience is backed up by the Bank of England’s liquidity facilities in sterling and foreign currencies.
All these resources will support orderly market functioning in the face of any short-term volatility. The Bank will continue to consult and cooperate with all relevant domestic and international authorities to ensure that the UK financial system can absorb any stresses and can concentrate on serving the real economy.
That economy will adjust to new trading relationships that will be put in place over time. It is these public and private decisions that will determine the UK’s long-term economic prospects.
The best contribution of the Bank of England to this process is to continue to pursue relentlessly our responsibilities for monetary and financial stability. These are unchanged.
We have taken all the necessary steps to prepare for today’s events. In the future we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.
As Bloomberg adds, The BOE has been preparing for more than a year to deal with this outcome and Carney will now have to rely on that crisis playbook to stem panic in financial markets. With the result announced on a normal trading day, the immediate threats of Brexit could include investors dumping U.K. assets and a drying up of bank funding.
The BOE “has undertaken extensive contingency planning and is working closely with HM Treasury, other domestic authorities and overseas central banks,” it said in a statement early Friday. “The Bank of England will take all necessary steps to meet its responsibilities for monetary and financial stability.”
Bank of Japan Governor Haruhiko Kuroda said on Friday that central banks will do their utmost to provide liquidity. Central banks around the world have been on high alert, and the chiefs of the Fed, BOJ, the Bank of Canada and the Swiss National Bank cited the referendum as being potentially disruptive.
As well as intensive supervision to ensure banks had enough cash ahead of the vote, BOE plans include additional funding operations and activation of swap lines with other central banks to help firms access overseas currencies. It also has a number of other “stability measures” available, though policy makers haven’t provided details in advance.
What happens next depends on how markets play out . At the time of the Scottish independence referendum in 2014 – where a potential splintering of the U.K. was averted – the BOE’s Financial Policy Committee emphasized readiness to “take steps rapidly” if needed.
So far, after both stocks and FX plummeted, there has been a modest rebound from historic lows, which saw the British pound drop to 31 year lows as risk assets already start to anticipate concrete action. The BOE has already added extra auctions this month to make funds available to lenders. It could cut its key interest rate to as low as zero from 0.5 percent, perhaps immediately, analysts at ING Bank NV said in a note to clients. Traders are now pricing in a more than 50 percent chance that the BOE will cut borrowing costs by its July meeting.
Beyond the immediate market ructions, there are longer-term policy issues. While Carney’s view was that the next BOE interest-rate move is “more likely to be up than down,” that was conditioned on a “Remain” decision. Recent signs have pointed to an economic slowdown, and the possible consequences of Brexit may include a spike in inflation, a rise in unemployment and even a recession. The BOE potentially faces what Carney has described as a “challenging trade off” between supporting growth and employment and stabilizing inflation.
The central bank has cited the U.K.’s record current-account deficit as a potential vulnerability, saying “an abrupt decline in capital inflows could pose a major financing difficulty.” Data in March showed the difference between money coming into the U.K. and money sent out widened to 32.7 billion pounds ($43.3 billion) in the fourth quarter. That equates to 7 percent of GDP, the most since records began in 1955.
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It wasn’t just Carney. Central banks across the world shifted into crisis-management mode, as the U.K.’s vote to leave the European Union tipped markets into turmoil and cast a pall over the already-weak outlook for global growth.
Officials in London, Frankfurt and Zurich are having to take the baton in the efforts to control the turmoil from Asian central banks, where the Bank of Japan reiterated its readiness earlier on Friday to intervene to hold down the yen, as investors sought refuge from plunging asset prices in Europe. Beyond the initial gyrations, central banks will face questions over how they can support growth and hit inflation targets at a time when policy instruments are already stretched.
Bank of Japan Governor Haruhiko Kuroda and Japan’s Finance Minister Taro Aso, whose country currently heads the Group of Seven, highlighted that central banks of six major developed nations have currency-swap lines at the ready to provide liquidity. Those lines, among the Japanese, U.S., euro-region, U.K., Swiss and Canadian central banks, were set up during the global financial crisis and made permanent in 2013. G-7 officials will speak by phone some time after midday European time, according to two people familiar with the matter, who declined to be identified because the talks are private.
The swaps will probably be activated, at least in London, Krishna Guha, the vice chairman of Evercore ISI in Washington who previously worked at the Federal Reserve Bank of New York, wrote in a note. “While there will be a G-7 statement and possibility of coordinated international intervention if currency markets become dysfunctional, we think the bar for such joint intervention is high and suspect that we may get unilateral action.”
South Korea and India were among those reported to have intervened in an effort to smooth trading in their currencies, while analysts said Denmark probably did the same and those including Singapore could step in. Kenya’s central bank said it was ready to temper market volatility, while counterparts including Thailand said they were monitoring the situation in their locations.
Eight years after the start of the global credit crisis, the post-Brexit turmoil seemed set to unleash a further wave of monetary easing, potentially including in the U.K. itself. Economists in research notes Friday highlighted that the People’s Bank of China could act, either through intervention to prop up its currency or potentially with a cut in the required reserve ratio for its commercial banks.
The Bank of Japan was already forecast to step up monetary easing at its policy meeting next month, with an historic surge in the yen serving to underscore that call. Aso, the finance chief, told reporters that stability in the foreign-exchange market is very important and that markets have been extremely jittery, with rough moves. He highlighted Japan’s concern about the impact of the Brexit vote on the global economy and said “we will respond properly if needed.”
Then, moments ago, the ECB issued a widely anticipated statement as well. This is what it said in the tersely worded and vague press release:
ECB is closely monitoring financial markets
- European Central Bank is closely monitoring financial markets
- ECB continues to fulfil its responsibilities to ensure price stability and financial stability in the euro area
Following the outcome of the UK referendum, the European Central Bank (ECB) is closely monitoring financial markets and is in close contact with other central banks.
The ECB stands ready to provide additional liquidity, if needed, in euro and foreign currencies.
The ECB has prepared for this contingency in close contact with the banks that it supervises and considers that the euro area banking system is resilient in terms of capital and liquidity.
The ECB will continue to fulfil its responsibilities to ensure price stability and financial stability in the euro area.
But the main question everyone will want answered is what the Fed will do: a Fed who rate hiking cycle is now officially dead, and the question is when the next rate cut, or outright QE will take place. As Bloomberg notes, for the Federal Reserve, the unsettled markets justified its decision to hold off on raising interest rates this month. U.S. stock-index futures were among those tumbling Friday, and the dollar climbed against all major currencies save the yen. U.S. Treasuries jumped.
“The Fed will want to see the impact from the U.K. vote before considering resuming rate rises so a July move looks very unlikely now,” a Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “The dollar, however, is likely to keep gaining across the board as foreign central banks consider rate cuts or FX intervention.”
We expect Yellen to make a statement shortly after, or perhaps before, the market open to do the one thing central banks do so well… perhaps the only thing: stabilize markets.