[Brexit], the MPC would face a challenging trade-off between stabilising inflation on the one hand, and stabilising output and employment on the other. The implications for monetary policy would not be automatic; its direction would depend on the relative magnitudes of the demand, supply and exchange-rate effects.”
Threadneedle Street is now in pre-referendum purdah, but it has been working on its post-Brexit strategy since it became inevitable that Britain’s 43-year-long relationship with the EU would be put to a vote.
A year ago, an email sent in error to the Guardian exposed that a secret taskforce, named Project Bookend, had already been set up to consider the financial shocks from Brexit.
In a repeat of the close scrutiny that took place during the turmoil that followed the collapse of Lehman Brothers, it is likely that individual banks will set up more regular reports for senior management about whether they are seeing big outflows from big companies and wealthy foreigners. Any banks thought to be in difficulties through no fault of their own will be able to tap unlimited quantities of cash provided by the Bank – and even those in good shape will be able to access the special funding.
Through the Bank’s regulation arm, the Prudential Regulation Authority, Carney is being kept abreast of plans by the big lenders to ensure they are prepared for the consequences of a Brexit vote. “We’re not directing them what to do, but we’re asking them what they are doing,” Carney has said.
Andrew Bailey, one of Carney’s deputies who runs the PRA, told Reuters last month – more than a month before the referendum – that he was already in daily contact with lenders over Brexit planning. “All the banks are looking at this very actively,” Bailey said.
He also made clear that the Bank expected the three extra funding opportunities to be used. After the one next week on 14 June, there is another just before the vote, on 21 June. The week after the result, the Bank intends to offer more cash on 28 June. “We are open for business for banks that want to take up those operations,” Bailey has said.
Bailey is one of the few senior officials who was at the Bank during the financial and economic crisis that began in the summer of 2007 and resulted in Britain’s longest postwar recession. All nine members of the MPC have changed since interest rates were last moved in March 2009, with the then governor Mervyn King stepping down in 2013. Bailey is himself scheduled to be leaving the Bank on 1 July – a week after the referendum – to head the City regulator, the Financial Conduct Authority. He will, however, continue to sit on the FPC and retain a seat on the PRA board.
Carney has been keen to avoid the Bank being caught in a policy vacuum, as it was when the pound was bundled out of the exchange rate mechanism on Black Wednesday on 16 September 1992. On that occasion, the Bank and the Treasury had to rebuild a policy framework from scratch, and to avoid a repetition Carney has been laying out his plans for several months.
One clear message is that cash will be available to banks ahead of the vote. “One of the lessons we learned from the Scottish experience was that it was better to announce potential liquidity facilities earlier to avoid sending a signal,” Carney has said.
By announcing the extra cash flows as long ago as March, Carney said he was hoping to avoid a situation in which the Bank announced a lending facility so close to the referendum. “However harmless and prudent and careful that is, some people will interpret it as a signal of potential stress. So by announcing it months in advance … we think we’ve avoided that and I think we have,” the governor said.
The Bank will also summon the assistance of other central banks – including the European Central Bank and the US Federal Reserve – to provide access to stocks of foreign currency in the event of a run on the pound, a course of action approved by the International Monetary Fund. “The Bank of England has appropriately announced plans to hold additional liquidity auctions in the weeks around the referendum,” the IMF said. “There may also be a need to activate swap facilities with other major central banks in the event of a shortfall of foreign exchange liquidity.”
Lenders have given clues to how they are readying themselves for market turmoil. Tushar Morzaria, finance director of Barclays, has said the bank was being “careful in how we manage our liquidity pool”.
This will result in Barclays and other banks holding more cash than they might otherwise have done. Banks do not anticipate savers withdrawing their life savings – as was the fear at the time of the Scottish referendum – but they will be watching the activities of foreign companies. Savers will be reassured that their nest eggs are guaranteed at an EU-wide equivalent of €100,000 (£78,000).
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