Finally, a financial flare-up that the world’s central banks would have seen coming.
On Friday morning London time — when the result of a UK referendum is to show whether the nation has chosen to leave the EU — the Bank of Japan (BOJ) and the Swiss National Bank’s Singapore desk could already be selling yen and Swiss francs.
They and their peers are also primed to pump liquidity into banks fearful of running dry and to push back against capital flight from the pound. It is what comes later that monetary policymakers are less ready for.
With the outcome of the British vote too close to judge, central bankers are reaching for measures honed during the last financial crisis to assuage investor nerves.
However, beyond calming words, potentially coordinated among G7 economies, and a flash of action should the UK tip markets into panic, the institutions might have little left to offer if the turmoil morphs into long-term downturn.
“On the market shock, we know the drill already,” Bank of America Merrill Lynch London-based chief European economist Gilles Moec said. “On the growth impact, this is where things get complicated. Monetary policy has been trying to shore up growth and it hasn’t been totally successful.”
The warning signs are evident. A gauge of bank borrowing costs last week hit the most extreme level since 2012, and the premium to swap foreign currencies into US dollars reached the highest since late last year.
Markets are sensitive to even small changes in the outlook for the referendum.
Japanese shares rose and the yen weakened yesterday, as a Survation poll for the Mail on Sunday showed the “Remain” camp garnering 45 percent of support with “Leave” on 42 percent.
UK futures and the pound rose.
The immediate response to a “Brexit” would likely be statements by the world’s major central banks of action or a readiness to act. G7 nations might even coordinate an announcement, as they did after the Japan tsunami in 2011.
If so, they can cite the centerpiece of preparedness — a six-way currency swap arrangement between the US Federal Reserve, the European Central Bank (ECB), the Bank of England, the Bank of Canada, the BOJ and the Swiss National Bank. Those lines, established during the 2008 financial crisis and made permanent in 2013, allow central banks to offer funds to lenders in each others’ currencies. That would be critical if the internationalized banking system finds itself in a global alarm.
If wider cooperation is needed, executives from the world’s 60 leading central banks are due to convene at the Bank for International Settlements’ annual meeting in Basel, Switzerland, on Saturday.
The Bank of England has already started pumping up cash cushions. Banks took ￡2.46 billion (US$3.59 billion) last week in the first of three special tenders, with the next ones scheduled for Tuesday and June 28. The ECB still offers lenders as much as cash as they need in its regular liquidity operations, and will inject more cheap funds this week in a program intended as credit stimulus.
Not that the eurozone is short of funds. Partly as a result of the ECB’s quantitative easing, excess liquidity in the 19-nation bloc is at an all-time high of more than 800 billion euros (US$907.11 billion).
More pain might be felt in jurisdictions where the currency is seen as a port in a storm, and policymakers there are showing bravado about their readiness to intervene.
Danish central bank Governor Lars Rohde on Wednesday last week said that he would do “whatever it takes” to safeguard the krone’s euro peg.
Swiss National Bank president Thomas Jordan, of the, has pledged to prevent the franc from gaining.
Japanese Minister of Finance Taro Aso on Friday said he would “like to take firm action” when needed to stem any rise in the yen, coordinating “closely” with other nations to avoid surprises.
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