- ECB says it will ensure ‘price and financial stability’
- Bank of England says it will take ‘all necessary steps’
Central banks across the world offered the financial system fresh funds and intervened in currency markets, in an effort to reassure investors sent into panic by the U.K.’s vote to leave the European Union.
After a majority of Britons voted to end their 43-year membership of the EU in a referendum, the Bank of England, the European Central Bank and the Bank of Japan issued statements stressing the availability of liquidity to keep the banking system running. The BOJ led the Swiss National Bank and the Danish central bank in displaying readiness to sell their local currencies to cap gains caused by investors seeking haven from the turmoil.
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. 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, and a new threat to growth hangs over Europe in particular.
“Central banks are always the first line of defense, and they can do something to stabilize the situation but they can’t fundamentally alter a negative trajectory,” Guntram Wolff, director of the Brussels-based Bruegel Institute, said by phone. “Monetary policy will be operating in huge uncertainty, and the realization that anti-European sentiments can actually win will weigh on sentiment and could bring back the possibility of recession.”
Italian and Spanish bonds fell and German bunds climbed as investors shunned higher yielding debt in favor of haven assets. The additional yield investors demand to hold Spain’s 10-year bonds over equivalent-maturity bunds rose to the highest since 2014, while Italy’s yield spread widened to the most in almost a year. U.S. treasury yields fell the most in seven years.
In a liquidity operation on Friday not related to the Brexit vote, the ECB allotted 399 billion euros ($442 billion) in four-year loans to banks in the 19-nation euro region. After a conference call of the Governing Council, the Frankfurt-based ECB said it will “continue to fulfill its responsibilities to ensure price stability and financial stability in the euro area.”
“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,” according to a statement published on the institution’s website.
International Monetary Fund Managing Director Christine Lagarde said the Washington-based lender “strongly” supports commitments by the ECB and the BOE to supply liquidity and curtail market volatility. “We will continue to monitor developments closely and stand ready to support our members as needed.”
The Swiss franc strengthened the most since the country’s central bank lifted its cap against the euro in January 2015, and the yen soared past 100 per dollar for the first time since November 2013. The Swiss National Bank confirmed that it intervened in the market on Friday to stabilize the franc, and will remain active if needed. Danish central bank Governor Lars Rohde said his institution will “do what’s necessary” to defend the krone’s peg to the euro.
Group of Seven
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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 finance chiefs said after a conference call on Friday they will “continue to consult closely on market movements and financial stability, and cooperate as appropriate.” Officials recognized that “excessive volatility and disorderly movements in exchange rates” can harm economic and financial stability and pledged to use“established liquidity instruments” to support the functioning of markets.
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.
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.
“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,” said 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.”
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.”
“We’ll see immediate action from those central banks seen as controlling safe-haven currencies, as they won’t want to see them appreciate,” Rob Carnell, chief international economist at ING Bank NV in London, said by phone. “We can’t really see beyond the next couple of weeks but the ECB may use this as an excuse for some more easing, though it’s difficult to see what more they can really do.”