Listen at the doors of two major gatherings of the world’s central bankers in Switzerland and Portugal this week, and one might hear little but the sound of forecasts being shredded.
The world’s monetary guardians are to convene at the Bank for International Settlements’ (BIS) annual meeting in Basel over the weekend, and at the European Central Bank’s (ECB) yearly policy forum in Portugal from today. At each event they might consider how, after years of striving to heal their economies, and with nascent signs of success in the halting normalization of US monetary policy and a gradual pickup of European credit, they have been set back by UK’s vote to leave the EU.
Policymakers who acted promptly on Friday to help quell market turmoil are likely to turn to assessing the impact of the British decision on growth and inflation prospects for the EU and beyond. In calibrating a response, they will be mindful that monetary policy is already severely stretched after almost a decade of financial turbulence.
Central bankers “will instinctively understand that “Brexit” is a negative for the global economic outlook,” Jefferies International Ltd London-based senior European economist Marchel Alexandrovich said by telephone. “Now it becomes a European issue, for banks and insurance companies. Two months ago we were hoping that the US Federal Reserve would raise rates, and there’d be higher yields at the end of the year. We’re in for a very long and uncertain road.”
Investors and policymakers would have to wait for the UK’s decision to filter through into economic data — first through sentiment indicators and then hard output figures. The European Commission’s confidence gauge for the eurozone to be released on Wednesday will likely be too soon to capture any changes. Smaller indicators, such as the Sentix Index due on July 4, have a short-enough lag to reflect some of the impact.
There is potential for significant reversals. Indicators including the ZEW investor expectations surveys for the eurozone and Germany’s influential Ifo Business Climate Index rose in the run up to the vote.
The BIS — an institution that has warned repeatedly about the dangers of overburdening monetary policy — might find itself hosting officials concerned that their initial pledges of liquidity need to be followed up with stronger action. The man they will most want to talk to — unless turmoil at home keeps him away — is Bank of England Governor Mark Carney.
“Governors endorsed the contingency measures put in place by the Bank of England and emphasized the preparedness of central banks to support the proper functioning of financial markets,” Bank of Mexico Governor Agustin Carstens said in an e-mail on Saturday.
Carstens commented as the chairman of the Global Economy Meeting, which is the principal discussion forum for central bank chiefs during the regular BIS bimonthly meetings.
Analysts including Bank of America Merrill Lynch chief European economist Gilles Moec now expect the Bank of England to cut its key interest rate to zero next month from the current record-low 0.5 percent, and expand its quantitative easing program by £50 billion (US$68.42 billion at current exchange rates) from August.
For the US, the Brexit saga has explicitly impacted the Fed’s plans to move interest rates from crisis-era lows.
Fed Chair Janet Yellen this month said that the impending vote played a role in the decision not to tighten.
Life at the ECB would scarcely be easier in coming days. Its annual forum in the Portuguese resort of Sintra is intended as an academic getaway, far from the pressures of markets, but there’s likely to be no escape from Brexit.
Bond spreads between eurozone nations widened on Friday as investors shunned higher yielding debt such as Spain’s in favor of havens such as Germany.
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