Central banks ready market defences
Brexit tips markets into turmoil and dims global growth outlook
FRANKFURT: Central banks across the world shifted into crisis-management mode, as the UK's vote to leave the European Union tipped markets into turmoil and cast a pall over the already-weak outlook for global growth.
At the centre of the drama, the Bank of England Governor Mark Carney said his institution “won’t hesitate” to take additional measures to ensure stability,” after a majority of Britons voted to end their 43-year membership of the EU.
The European Central Bank, also facing a major shock to the fragile growth and inflation picture for the 19-nation euro zone, had not commented on its response by the time European markets opened, though in recent days officials have stressed that liquidity lines remain available.
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 yesterday 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.
“Central banks are always the first line of defence, and they can do something to stabilise the situation but they can’t fundamentally alter a negative trajectory,” Guntram Wolff, director of Brussels-based Bruegel Institute, said by phone.
“Monetary policy will be operating in huge uncertainty, and the realisation that anti-European sentiments can actually win will weigh on sentiment and could bring back the possibility of recession” in Europe, he said.
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.
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 yesterday to stabilise the franc, and will remain active if needed.
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, US, euro-region, UK, 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 UK itself. Economists in research notes 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.
US stock-index futures were among those tumbling yesterday and the dollar climbed against all major currencies save the yen. US Treasuries jumped too.
“The Fed will want to see the impact from the UK vote before considering resuming rate rises so a July move looks very unlikely now,” a Mansoor Mohi-uddin, a Singaporebased 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 its difficult to see what more they can really do.” – Bloomberg