BoE to take ‘all necessary steps’

The Bank of England and European Central Bank stand ready to turn the tap on billions of dollars in liquidity.

The Bank of England and European Central Bank took steps to calm febrile financial markets in the wake of the UK’s decision to exit the European Union, pledging to flood the financial system with cash.

And central banks in Asia are considering fresh policy moves to shore up their economies after Britain’s vote.

The BoE would deploy all the necessary tools in its arsenal to maintain stable prices and safeguard the stability of the financial system.

Mark Carney, the BOE’s governor, on Friday said the UK central bank stands ready to pump at least £250 billion ($US371.85bn) into the financial system to keep it functioning smoothly.

“The people of the United Kingdom have voted to leave the European Union. Inevitably, there will be a period of uncertainty and adjustment following this result,” the BOE governor said in a televised statement.

“The bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward,” Mr. Carney said.

The BOE said it is in close contact with other central banks as markets swooned following the UK’s shock decision to quit the EU.

And the ECB said on Friday it is closely monitoring financial markets in the wake of Britain’s historic vote to exit the European Union, and stands ready to provide additional liquidity in euros and foreign currencies.

The announcement comes as financial markets ricocheted early on Friday in response to the surprise outcome of the UK’s referendum on its membership of the bloc.

“Following the outcome of the UK referendum, the European Central Bank is closely monitoring financial markets and is in close contact with other central banks,” the ECB said on its website.

“The ECB stands ready to provide additional liquidity, if needed, in euro and foreign currencies,” the central bank said.

The ECB is able to tap existing currency swap lines established during the financial crisis with five major central banks -- the Bank of England, Bank of Canada, the Bank of Japan, the Federal Reserve and the Swiss National Bank. They allow eurozone banks to ask the ECB for dollars or pounds, for instance, and UK banks to ask the Bank of England to provide dollars or euros.

The ECB said it had “prepared for this contingency in close contact with the banks that it supervises,” and that it considers that the euro area banking system to be “resilient in terms of capital and liquidity.”

It also pledged to “fulfill its responsibilities” in ensuring price stability and financial stability in the euro area. The ECB aims to keep inflation just below 2 per cent, a target it has missed for three straight years.

The referendum result comes at an awkward time for the ECB, whose top officials had been signaling recently that, after years of unprecedented stimulus measures, they had probably done enough to drive inflation back up to their near-2 per cent target.

That calculation may now have to be revised, economists said, as the British vote risks undermining confidence in the region’s fragile recovery. The ECB has already cut interest rates below zero and is purchasing €80 billion of public and private bonds a month.

ECB President Mario Draghi warned earlier this month that a British decision to leave the European Union represented a threat to the bloc’s modest economic recovery, though he said the ECB was “ready for all contingencies.”

Meanwhile, Bank of Japan Governor Haruhiko Kuroda said the central bank is prepared to take action, though he didn’t specify what form it might take or what the objective might be.

In the aftermath of the “Brexit” vote, the yen could rise to 95 or even 90 against the dollar, hurting corporate profits and private consumption, said Takuji Okubo, chief economist at Japan Macro Advisors. “If that happens the sense that Abenomics has failed will be very widespread,” he added.

Some economists say the BOJ has little power to weaken the yen with monetary policy alone. Its quantitative easing is seen as overextended after three years of aggressive asset purchases. Its setting of a negative interest rate on some bank reserves in February has pushed borrowing costs lower, but this hasn’t stimulated borrowing and the policy remains widely unpopular.

In a statement posted on its website late Friday, the PBOC pledged to keep the yuan “basically stable at a reasonable equilibrium level” as it tries to let market forces play a bigger role in setting its value.

Meanwhile, India’s central bank chief sought to reassure the nation after the benchmark S&P BSE Sensex fell as much as 4 per cent and the rupee weakened 1.4 per cent against the dollar to its lowest level in nearly four months, as investors reacted to the U.K. vote.

Reserve Bank of India Governor Raghuram Rajan said the central bank was keeping an eye on the markets and was “fully ready to provide whatever liquidity is needed, both dollar liquidity as well as rupee liquidity.”

The Swiss National Bank said on Friday that it has intervened in currency markets in the wake of the UK decision to exit the European Union.

“Following the United Kingdom’s vote to leave the European Union, the Swiss franc came under upward pressure,” the SNB said in a statement. “The Swiss National Bank has intervened in the foreign exchange market to stabilise the situation and will remain active in that market.”

Singapore’s central bank said Friday it is prepared to step in to stabilise the Singapore dollar and prop up the banking system.

The UK voted 52 per cent to 48 per cent to exit the bloc in a vote that has rocked markets and risks sparking political and economic turmoil in the UK and beyond. Prime Minister David Cameron resigned Friday, saying new leadership was needed to negotiate the UK’s departure from a club it has spent more than 40 years helping to shape.

The pound fell by more than 11 per cent Thursday night and into Friday morning, while stock markets in Asia fell, a brutal drubbing for investors who had stacked up bets it would go the other way.

Investors will be watching the European Central Bank closely. It said earlier this month that it stands ready to work with the BOE provide cash to financial markets if needed.

Dow Jones newswires