Carney Pledges $345 Billion to Fund First Line of Brexit Defense

Carney: Bank of England Well Prepared For Brexit
  • BOE governor says BOE will consider other measures if needed
  • U.K. votes by 52% to 48% to leave the European Union

Mark Carney isn’t taking any chances.

As markets went into turmoil and the pound plunged to a three-decade low after Britain voted to leave the European Union, the Bank of England issued an early morning statement and its governor stepped in with a pledge to provide an extra 250 billion pounds ($345 billion) for the financial system. He also said the BOE has further measures if needed to deal with what he described as a “period of uncertainty and adjustment.”

“Some market and economic volatility can be expected as this process unfolds,” Carney said in a televised statement in London. His comments followed Prime Minister David Cameron’s announcement that he will step down this year, which will add an additional layer of political uncertainty to the tumult.

The BOE has been preparing for more than a year to deal with this outcome and Carney is now relying on that crisis playbook to stem panic in financial markets and prevent a sell-off in U.K. assets and a drying up of bank funding. It wasn’t just sterling that took a hit as the results of the Brexit vote became clear on Friday. Global stocks tumbled, investor bets rose on a July interest-rate cut by the BOE and S&P Global Ratings said the U.K. will lose its top credit grade.

The final tally showed 52 percent of U.K. voters opted to leave the EU. As the direction of voting became clear, turbulence hit foreign-exchange markets, with the pound falling more than 11 percent against the dollar -- a daily record. It was down 7.9 percent at $1.3702 at 12:51 p.m. London time and traded 5.3 percent lower against the euro at 80.68 pence. The FTSE-100 Index slid 4.4 percent and Europe’s Stoxx 600 Index plunged 7.4 percent.

The central banks of the world’s biggest economies reacted with a mix of promises and action. The European Central Bank and the Bank of Japan issued statements stressing the availability of liquidity to keep the banking system running. The Swiss National Bank intervened on Friday to prevent a surge in the franc.

The Group of Seven nations are said to plan to confer later on Friday, and officials from about 60 global monetary authorities will meet this weekend in Basel, Switzerland.

In the U.K., Carney said policy makers will assess conditions in the coming weeks and “consider any additional policy responses.” The BOE has already added extra funding auctions this month for lenders.

“The bank is right,” Ewen Cameron-Watt, chief investment strategist at BlackRock Investment Institute, said in a Bloomberg television interview. “The bank is putting financial stability first, second and third. It can afford to worry about inflation down the track, can afford maybe to worry about the currency down the track.”

Rate Cut Option

The BOE could lower its key interest rate, according to JPMorgan Chase & Co., Goldman Sachs and ING Bank, with the latter predicting a move might come immediately. Traders are pricing in close to a 50 percent chance that the central bank will cut borrowing costs by its July meeting, according to data compiled by Bloomberg using swaps on the sterling overnight index average.

In its first statement in response to the referendum, the BOE said it’s working with the U.K. Treasury and other central banks. It will take “all necessary steps to meet its responsibilities for monetary and financial stability.” It had previously said its contingency plans included “intensive supervision” of banks, additional funding and activation of swap lines with other central banks. An additional liquidity operation is scheduled for June 28.

Economic Slowdown

Beyond the immediate market ructions, there are longer-term policy issues. Recent signs have pointed to an economic slowdown, and the possible consequences of Brexit may include accelerating consumer prices, 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 also 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 a record 7 percent of GDP in the fourth quarter.

While inflation is just 0.3 percent, well below the BOE’s 2 percent target, analysts see it accelerating through this year, and a weaker pound could boost prices further by raising the cost of imports. Still, that may be partly offset by weaker domestic demand.

In a Bloomberg survey before the vote, 85 percent of respondents said the U.K. economy would need further support in the event of Brexit, with credit-easing measures, quantitative easing and rate cuts among the options. The BOE’s key rate hasn’t budged from its record-low in more than seven years, while the bank stopped asset purchases back in 2012.

The Monetary Policy Committee has its next scheduled policy announcement on July 14. Before then, the BOE’s Financial Policy Committee -- also chaired by Carney -- holds a quarterly meeting and the governor is due to speak at a press conference to publish its report on July 5.

There may be other complications. 

Political uncertainty could spark further volatility in sterling and gilts. S&P will give the country 24-hours notice, including one working day, before lowering the nation’s credit rating “at least one notch” from AAA, Moritz Kraemer, global sovereign chief ratings officer, said in an interview on Bloomberg Television.

There may also be questions over Carney’s relationship with Westminster after criticism by some prominent “Leave” lawmakers for being too close to the “Remain” position.

Carney’s position “is clearly in some question,” former BOE policy maker Danny Blanchflower said in a Bloomberg television interview.

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