Brexit – Page 2 – Digital Finance Analytics (DFA) Blog

There Are Limits To Monetary Policy – Carney

In a speech entitled “Uncertainty, the economy and policy“, given by Mark Carney, Governor of the Bank of England, he highlights that waves of uncertainty are washing over the UK economy, and these waves are getting larger. The result of the referendum is clear. Its full implications for the economy are not. But the question is not whether the UK will adjust but rather how quickly and how well. As risks have risen, further monetary policy interventions are likely, but he says there are limits to how much can be achieved with these levers.

… The decision to leave the European Union marks a major regime shift. In the coming years, the UK will redefine its openness to the movement of goods, services, people and capital. In tandem, a potentially broad range of regulations might change.

Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time. While some of the necessary adjustments may prove difficult and many will take time, the transition from the initial shock to the restructuring and then building of the UK economy will be much easier because of our solid policy frameworks.

At times of great uncertainty, households, businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job?

In recent years, economic uncertainty has been elevated because of fragilities in the financial system and overhangs of public and private debt.

These challenges have been compounded by deeper forces that have radically altered the balance of saving and investment in the global economy. In the process, these have moved equilibrium interest rates into regions that monetary policy finds difficult to reach. Whether called ‘secular stagnation’ or a ‘global liquidity trap’, the drag on jobs, wages and growth is real.

All this uncertainty has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets – that is, a heightened sensitivity to downside tail risks, a growing caution about the future, and an aversion to assets or irreversible decisions that may be exposed to future ‘disaster risk’.

Even before 23rd June, we observed the growing influence of uncertainty on major economic decisions. Commercial real estate transactions had been cut in half since their peak last year. Residential real estate activity had slowed sharply. Car purchases had gone into reverse. And business investment had fallen for the past two quarters measured. Given otherwise accommodative financial conditions and a solid domestic outlook, it appeared likely that uncertainty related to the referendum played an important role in this deceleration.

It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected. Moreover, its effects will be reinforced by tighter financial conditions and possible negative spill-overs to growth in the UK’s major trading partners.

As the MPC said prior to the referendum, the combination of these influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than set out in the May Inflation Report. In such circumstances, the MPC will face a trade-off between stabilising inflation on the one hand and avoiding undue volatility in output and employment on the other. The implications for monetary policy will depend on the relative magnitudes of these effects.

Today, while the economy is more complex and our models less reliable, the Bank has identified the clouds on the horizon and can see that the wind has now changed direction.

Over the past few months, working closely with the Chancellor and with HM Treasury, we put in place contingency plans for the initial market shocks. They are working well.

Over the coming weeks, the Bank will consider a host of other measures and policies to promote monetary and financial stability.

In short, the Bank of England has a plan to achieve our objectives, and by doing so support growth, jobs and wages during a time of considerable uncertainty.

Part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do.

In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock. The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers.

These will be driven by much bigger decisions; by bigger plans that are being formulated by others. However, we will relentlessly pursue monetary and financial stability. And by doing so we will facilitate the adjustments needed to realise this economy’s full potential.

Feds Perspective on Brexit

Fed Governor Jerome H. Powell’s address “Recent Economic Developments, Monetary Policy Considerations and Longer-term Prospects” included commentary on Brexit.

My baseline expectation has been that our economy is likely to continue on its path of growth at around 2 percent. I have also expected the ongoing healing in labor markets to continue, with healthy wage increases and job creation. As the economy tightens, I have expected that inflation will move up over time to the Committee’s 2 percent objective.

For some time, the principal risks to that outlook have been from abroad. Global economic and financial conditions are particularly important for the U.S. economy at the moment. Weakness in economic activity around the world and related bouts of financial volatility have weighed on the performance of our economy. Given the stronger performance of the U.S. economy, the trade-weighted value of the dollar has risen roughly 20 percent since 2014. Such a large appreciation of the dollar means that we will “export” some of our strength to our trading partners and “import” some of their weakness.

Growth and inflation remain stubbornly low for most of our major trading partners. European and Japanese authorities have limited scope to respond, with daunting longer-run fiscal challenges and policy rates already set below zero. In China, stimulus measures should support growth in the near term, but may also slow China’s necessary transition away from its export- and investment-led business model. Emerging market nations such as Brazil, Russia and Venezuela face challenging conditions.

These global risks have now shifted even further to the downside, with last week’s referendum on the United Kingdom’s status in the European Union. The Brexit vote has the potential to create new headwinds for economies around the world, including our own. The risks to the global outlook were somewhat elevated even prior to the referendum, and the vote has introduced new uncertainties. We have said that the Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks. We are prepared to provide dollar liquidity through our existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for our economy. Although financial conditions have tightened since the vote, markets have been functioning in an orderly manner. And the U.S. financial sector is strong and resilient. As our recent stress tests show, our largest financial institutions continue to build their capital and strengthen their balance sheets.

It is far too early to judge the effects of the Brexit vote. As the global outlook evolves, it will be important to assess the implications for the U.S. economy, and for the stance of policy appropriate to foster continued progress toward our objectives of maximum employment and price stability.

I am often asked why rates remain so low now that we are near full employment. A big part of the answer is that, at least for the time being, the appropriate level of rates is simply lower than it was before the crisis. As a result, policy is not as stimulative as it might appear to be. Estimates of the real interest rate needed to keep the economy on an even keel if it were operating at 2 percent inflation and full employment–the “neutral rate” of interest–are currently around zero. Today, the real short term interest rate is about negative 1-1/4 percent, so policy is actually only moderately stimulative. I anticipate that the neutral rate will move up over time, as some of the headwinds that have weighed on economic growth ease.

Don’t believe the Brexit prophecies of economic doom

From The Conversation.

The shock and horror at the Brexit vote has been loud and vociferous. Some seem to be revelling in the uncertainty that the referendum result has provoked. The pound falling in value, a downturn in markets – it lends credence to the establishment’s claims before the referendum that a Leave vote would lead to economic Armageddon.

But there are plenty of reasons to reject the consensus that Brexit will be costly to the UK’s economy. Even though markets appear stormy in the immediate aftermath of the vote, the financial market reaction to date has more characteristics of a seasonal storm than of a major catastrophe.

We were told that the consensus of economic experts were overwhelmingly opposed to a Brexit. Lauded institutions – from the IMF, OECD to the Treasury and London School of Economics – produced damning forecasts that ranged from economic hardship to total disaster if the UK leaves the EU. Yet 52% percent of the British electorate clearly rejected their warnings.

Something that my professional experience has taught me is that when an “accepted consensus” is presented as overwhelming, it is a good time to consider the opposite. Prime examples of this are the millennium bug, the internet stock frenzy, the housing bubble, Britain exiting the European exchange rate mechanism (ERM) and Britain not joining the euro. In each of these examples, the overwhelming establishment consensus of the time turned out to be wrong. I believe Brexit is a similar situation.

Downright dangerous

The economic models used to predict the harsh consequences of a Brexit are the tools of my profession’s trade. Used properly, they help us to better understand how systems work. In the wrong hands they are also downright dangerous. The collapse of the hedge fund Long-Term Capital Management in 1998 and the mispricing of mortgage backed securities leading up to the 2008 financial crisis are just two of many examples of harmful consequences arising from the abuse of such models.

The output of these often highly sophisticated models depends entirely upon the competence and integrity of the user. With miniscule adjustment, they can be tweaked to support or contradict more or less any argument that you want.

The barrage of dire economic forecasts that were delivered before the referendum were flawed for two main reasons. First, they failed to acknowledge the risks of remaining in the EU. And second, the independence of the forecasters is open to question.

Let’s start with the supposed independence of the forecasting institutions. While economists should in theory strive to be independent and objective, Luigi Zingales from the University of Chicago provides a compelling argument that, in reality, economists are just as susceptible to the influence of the institutions paying for their services as in other industries such as financial regulators.

Peer pressure

Another challenge faced by economists is presented by the nature of the subject matter. Economics is a social science which, at its heart, is about the psychology of human social interactions. Many models try to resolve the difficulties that human subjectivity causes by imposing assumptions of formal rationality on their models. But what is and is not rational is subjective. In further recognition of this difficulty the sub-discipline of behavioural economics has evolved.

Herding is a concept that has been used to rationalise financial market bubbles and various other behaviour. It describes situations in which it seems rational for individuals to follow the perceived consensus. Anyone who has found themselves in a position where the majority of their company has a radically different view to their own will have experienced the difficulty of standing out from the crowd.

In 2005-06, various people (including myself) presented the view that house prices would crash. While some audiences were sympathetic, the majority view at the time was both hostile and derisory. Challenging the received wisdom exposes you to feelings of isolation.

Received wisdom among academia has been that the EU is a force for good that should be defended at all costs. Respected colleagues are incredulous that anyone with their education and professional insights could think otherwise and remain part of the academic “in” crowd. In such an environment, it is very difficult to challenge this orthodoxy.

I – and the bulk of the UK population – might have been convinced by the pro-Remain economists if they had been a little more honest about the limitations of their models, and the risks of remaining inside the EU.

Market reactions

Despite reports of markets crashing following the Brexit result, when you put the current level of volatility in context of other shocks, market conditions are not as bad as they might seem. The FTSE 100 is still higher than it was barely two weeks ago and the more UK-focused FTSE 250 is currently higher than it was in late 2014. This is the kind of volatility that markets see two or three times a year.

The volatility index for the US S&P, known as the VIX or the “fear gauge”, is what is widely used to measure how uncertain global financial market participants are about the outlook for stocks. When the Brexit result was first announced, the VIX moved sharply, but has since settled in the mid-20s. To put this in context, the all-time average is 20.7, the all-time closing low is 8.5 and the all-time closing high on Black Monday in 1987 was 150. More recently during the financial crisis, it reached a closing high of 87.2 in November 2008.

VIX volatility chart. CBOE

Other financial indicators also moved rapidly as the referendum results came through. On the face of it, the Japanese market suffered a severe shock falling almost 8%. However, the 8% fall in the Japanese stock market is almost exactly matched by an 8% gain of the Japanese yen relative to the pound. Therefore, the net effect for UK-based investors in Japanese equities is close to zero.

The fall in the value of the pound following the Brexit result is also not as bad as it may first appear. The size of the fall was exacerbated by the previous day’s assumption that Remain would win. There is also precedent for a dramatic fall – after the ERM crisis – which proved beneficial for many British exporting companies and arguably helped sustain the economic recovery of the 1990s.

A lower pound benefits companies that add most of the value to their products inside the UK, and companies that sell their produce on international markets. This includes exporters like pharmaceutical company GlaxoSmithKline, drinks company Diageo and technology company ARM – all of which saw stock price gains on the morning after the vote. Companies that rely on imports and add little value within the UK will be hardest hit in the short term as they adapt to the exchange rate volatility.

There will undoubtedly be winners and losers from the UK’s decision to leave the EU. But indexes for volatility are already lower than they were in February this year, suggesting that markets are not abnormally worried about the outlook, and UK government borrowing costs are at an all time low. This is further reason to reject the pre-referendum consensus that Brexit would bring economic doom.

Author: Isaac Tabner, Senior Lecturer in Finance, University of Stirling

UK Loses AAA Rating – S&P

Rating agency Standard & Poor’s (S&P), the only agency which had previously given the UK a AAA rating, just revised it down. S&P said the the referendum result could lead to “a deterioration of the UK’s economic performance, including its large financial services sector”. They say Brexit will “weaken the predictability, stability, and effectiveness of policy making in the UK”. This follows downgrades from Fitch – from AA+ to AA – forecasting an “abrupt slowdown” in growth in the short-term and Moody’s last Friday cut the UK’s credit rating outlook to negative.

A ratings drop is likely to raise the cost of Government debt on the international markets. Here is the pound US$ chart, which fell further on Monday to a 31 year low.

Brexit increases ‘stagflation’ risk: Pimco

InvestorDaily reports that the decision by UK voters to leave the European Union has increased the likelihood of a low-inflation/stagnation (‘stagflation’) scenario over the medium term, says Pimco.

In a note to investors titled From Brexit to Stagflation, Pimco global economic adviser Joachim Fels said investors face a “higher chance of stagflationary outcomes” over the next three to five years.

“This would likely come to pass if current or future governments turn more protectionist by erecting barriers to trade and migration, and take up or intensify the battle against inequality by redistributing income from capital to labour,” he said.

The UK’s decision to leave the European Union last week has already had severe consequences for both UK and global markets, with the pound reaching a 30-year record low.

The ASX lost 3.2 per cent on Friday as news of the referendum outcome was known, and AMP Capital’s head of fundamental equities Michael Price noted that the financial and resources sectors were being hit hardest.

Mr Price added that whether investors treat Australia as a safe-haven or a vulnerable economy is yet to be seen, with lower growth and bond yields likely to result in resurgent yield trading.

“The Australian market has rallied for three years without earnings growth and could be considered expensive and vulnerable to a loss of global confidence,” he said.

In the UK, according to JP Morgan, growth will continue to slow down, with a reduction in annualised pace from 1.6 per cent to 0.6 per cent in the second half of 2016.

JP Morgan chief market strategist for the UK, Stephanie Flanders, said inflation is likely to jump to 3.0 or 4.0 per cent by the end of 2017, a significant increase on previous forecasts of 1.7 per cent.

What Britain’s decision to leave the EU means for Australia

From The Conversation.

Britain’s decision to leave the European Union has opened a fundamental crack in the western world. Australia’s relationship with the United Kingdom is grounded in the UK’s relationship with the EU.

Given Australia’s strong and enduring ties with the UK and the EU, the shockwaves from this epoch-defining event will be felt in Australia soon enough. Most immediately, the impending Australia-EU Free-Trade Agreement becomes more complicated and at the same time less attractive.

What will happen to trade ties?

The importance of Australia’s relationship with the EU tends to get under-reported in all the excitement about China. We might ascribe such a view to an Australian gold rush mentality. Nevertheless, Australia’s trading ties to the EU are deep and strong.

Such ties looked set to get stronger. In November 2015 an agreement to begin negotiations in 2017 on a free-trade deal was announced at the G20 summit in Turkey. Trade Minister Steven Ciobo said in April 2016 that an Australia-EU free trade agreement:

… would further fuel this important trade and investment relationship.

When considered as a bloc, the EU consistently shows up as one of Australia’s main trading partners. Consider the statistics below:

in 2014 the EU was Australia’s largest source of foreign investment and second-largest trading partner, although the European Commission placed it third after China and Japan in 2015;

in 2014, the EU’s foreign direct investment in Australia was valued at A$169.6 billion and Australian foreign direct investment in the EU was valued at $83.5 billion. Total two-way merchandise and services trade between Australia and the EU was worth $83.9 billion; and

the EU is Australia’s largest services export market, valued at nearly $10 billion in 2014. Services account for 19.7% of Australia’s total trade in goods and services, and will be an important component of any future free trade agreement.

This is all well and good. But when not considered as a bloc, 48% of Australia’s exports in services to the EU were via the UK; of the $169 billion in EU foreign direct investment, 51% came from the UK; and of Australia’s foreign direct investment into the EU, 66% went to the UK.

You get the picture.

The UK was Australia’s eighth-largest export market for 2014; it represented 37.4% of Australia’s total exports to the EU. As Austrade noted:

No other EU country featured in Australia’s top 15 export markets.

In short, the EU is not as attractive to Australia without Britain in it.

Beyond trade numbers

But the Australia-EU-UK relationship cannot be reduced to numbers alone. It also rests on values shared between like-minded powers.

Brexit represents the further fracturing of the West at a moment when that already weakening political identity is in relative decline compared to other regions of the world, notably Asia (or more specifically China).

EU-Australia relations rest on shared concerns such as the fight against terrorism advanced through police collaboration and the sharing of passenger name records. The EU and Australia also collaborated to mitigate climate change at the Paris climate summit. And they work for further trade liberalisation in the World Trade Organisation – but don’t mention agriculture.

Without the UK, these shared political tasks become harder.

Clearly, Australia-UK relations rest on a special historical relationship. However, it has seen efforts at reinvigoration, as British governments buckled under the pressure of the Eurosceptics among the Conservatives.

David Cameron addresses the Australian parliament in 2014.

Beyond everyday trade, historical links have been reinforced through the centenary of the first world war and the UK-Australia commemorative diplomacy that has come with this four-year-long event.

Cultural ties are most regularly and publicly affirmed through sporting rivalries such as netball, rugby and most notably cricket. Expect these ties to be reinforced as the UK seeks trade agreements and political support from its “traditional allies”.

For those with British passports, there will be a two-year period of grace as the UK negotiates its exit. After that, it will be quicker to get into the UK at Heathrow, but this might be small consolation for the loss of a major point of access to the EU.

The vote to leave is a major turning point in Europe’s history. It marks a significant crack in a unified concept of “the West”. It is not in Australia’s interests.

It’s time for Australia to make new friends in Europe.

Author: Ben Wellings, Lecturer in Politics and International Relations, Monash University

Four ways Brexit will hit UK Households personal finances

From The Conversation.

British people have woken up to the news that their country has voted to leave the European Union. Along with this, there has been turmoil in financial markets – the pound has hit a 30-year low and the FTSE dropped more than 8%.

Though the Brexit process will probably take two years (and the UK will remain a full member of the EU in the meantime), some aspects of the decision will affect British people straight away.

1. The pound in your pocket

There is inevitably going to be a period of uncertainty and turmoil. As the referendum result emerged, the pound fell 10% against the US dollar on the foreign exchange markets and 7% against the Euro. If this persists, things the UK imports, such as oil (affecting domestic fuel prices and petrol), foreign cars, coffee, bananas and clothing, will cost more. Overall, then, the general price level may rise meaning that your income will not stretch quite so far.

If you’re holidaying abroad over the coming months and haven’t bought your currency yet, the weaker pound means you’ll also now pay more.

2. Your job and income

A weak pound affects industry as well and so may impact on jobs. Company costs will rise if they import their raw materials and most firms will be hit by higher fuel prices. But the fall in sterling makes it easier for exporters to sell their goods and services abroad. So some jobs and wages may be more at risk, while recruitment rises in other areas.

Longer term, economists have been remarkably consistent in predicting that UK growth is likely to be lower outside the EU than it would have been inside. Businesses do not like uncertainty, so they may put off investing in new plant, machinery and jobs, as being outside the EU trading bloc may make trading with other countries more difficult and some firms may decide to quit the UK. This could mean that jobs and wages will be lower than they might otherwise have been, though not necessarily lower than today.

Before the referendum, Chancellor George Osborne threatened a post-Brexit emergency Budget that would cut public spending and raise taxes. This seems an unlikely immediate response since it would further depress the UK economy just when it is reeling with uncertainty and MPs across all parties were quick to say they would not support such measures. A new prime minister, due from October, may well appoint a new chancellor with his or her own ideas.

3. Your savings and pensions

Uncertainty while markets adjust and firms decide how to respond means the UK stock market is likely to be volatile for some time. Anyone who has recently retired and opted to take an income using drawdown (periodic cashing in of a pension fund still invested in the stock market) may have to take tough decisions about drawing less income now or risk running out of retirement savings later on.

Pensioners may face some complications. shutterstock.com

Savers have suffered since the global financial crisis of 2008 with rock-bottom interest rates. It’s unclear what might happen to these. On the one hand, rising consumer prices may push interest rates up; and credit rating agencies have said they may downgrade UK government debt which means the government would have to raise interest rates to persuade savers to buy its debt. But, if the economy struggles to grow, the Bank of England – which has said it stands ready to deploy any measures to maintain financial stability – might embark on new rounds of quantitative easing to keep interest rates low to encourage economic growth.

4. Your home and mortgage

While savers would welcome a rise in interest rates, this would increase mortgage repayments for borrowers and could even trigger repossessions. The International Money Fund has predicted that UK house prices could drop sharply post-Brexit. You might be concerned about that if you are in one of the six out of ten UK households that own their own home. But this could be good news for younger generations who have been struggling to afford a home.

Author: Jonquil Lowe, Lecturer in Personal Finance, The Open University

Did Bank of England governor speech shore up confidence in Brexit UK?

From The Conversation.

Bank of England Governor Mark Carney was admirably quick to read the unfolding economic dangers of a Brexit when the referendum result was declared. While stock markets and sterling plummeted amid developing financial stress, the governor’s statement immediately brought to mind the famous “whatever it takes [to save the euro]” intervention by European Central Bank chief Mario Draghi at the height of the eurozone crisis in July 2012.

Carney started by making clear that the British banks are safe since their capital requirements are now ten times higher than before the 2008-2009 financial crisis. The purpose of these high requirements is to ensure banks will be able to pay off their depositors, which aims to reduce the risk of a banking panic.

Indeed, the UK banks have been stress-tested against more adverse scenarios than what the Treasury thought that Brexit might trigger. The scenarios included residential property prices falling by over 30% and the level of GDP falling by 4% at the same time as a 5% rise in unemployment.

The governor was obviously seeking to reassure the public that whatever the economic/financial headwinds after the Brexit vote, British banks are rock solid and won’t see a repeat of the queues outside Northern Rock branches nine years ago.

Carney was absolutely right to do this. Lack of confidence in domestic banks often triggers recessions as depositors withdraw money, which restrict the banks’ ability to lend and keep the economy growing. This can be particularly lethal when combined with capital flight, which is where nervous investors offload a country’s currency and assets priced in the currency for fear that it is falling in value.

In Britain’s case, there were reasons on the ground to justify the intervention. British customers have queued outside banks to ditch sterling in an attempt to “hedge” against Brexit. And the news of sterling dropping like a stone on the night of the count was a strong signal that investor confidence was deserting the UK.

The worries of these investors are well summed up by the IMF’s warnings over Brexit:

[It] could entail sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows into key sectors such as commercial real estate and finance.

The UK’s record-high current account deficit and attendant reliance on external financing exacerbates these risks. Such market reactions could sharply contract economic activity, further depressing asset prices in a self-reinforcing cycle.

The liquidity weapon

As well as the reassurances about strong banks, Mark Carney also said the Bank of England is prepared to inject up to £250bn of liquidity for financial institutions to keep the economy going in these difficult times ahead. Without doubt, this is substantial financial help amounting to some two-thirds of the £375bn that the central bank has already pumped into the system in the form of quantitative easing in recent years.

Carney also referred to “extensive contingency planning” with Chancellor George Osborne throughout the night, as well as mentioning potential “additional measures” such as providing substantial liquidity in foreign currency if it was needed. That might desperately be needed by British companies trading internationally which might be exposed to large fluctuations in exchange rates because of turbulence with sterling.

Yet the governor deliberately didn’t spell out what any other measures might be. One option might be to cut the base rate down to zero or even charge banks for “parking” their cash with the Bank of England. The European Central Bank is already doing this to encourage European banks to continue lending to the private sector.

Carney was right not to reveal his full defensive armour yet. Suffice for the time being to let both the public and the markets know he has other policy weapons in place and is ready to be tested if the economic conditions make it necessary.

Cameron steps down

The governor’s speech came shortly after David Cameron resigned. The British prime minister was trying to show a very brave face by delaying his departure to October. This makes absolute economic and political sense because the captain of a sinking (UK) ship has a moral obligation to be the last one to abandon it.

Cameron’s last stand. Matt Dunham/PA

Yet in truth, the eurosceptic Tories would hardly trust him to start the Brexit negotiations with the EU when he has fought passionately to stay in. He therefore might lose his job much earlier than he thinks. Not that this would have made any difference to the markets – his defeat made his departure unavoidable. The only thing that might have further traumatised the markets would have been if he had not resigned.

But despite Carney and Cameron’s efforts to steady the markets, they could do nothing to disguise the UK’s lack of preparation or plans for handling the Brexit negotiations. There are many possible options for trade deals with the EU but no clear direction.

The Brexit camp, particularly Justice Secretary Michael Gove, has attacked the economic “experts” who overwhelmingly warned of the huge economic and financial risks of such a move. They warned that four UK companies would lose out for every one that benefits from leaving the EU.

The odd argument of the Brexit camp is that these experts have to be wrong because they did not predict the 2008-09 financial crisis. “Once wrong, always wrong,” in other words. Now that Mark Carney has had to step in while the politicians try and work out what happens next, we will know pretty soon whether we economists are going to be wrong this time around. Don’t be surprised if we haven’t seen the last intervention from the Bank of England.

Authors:Costas Milas,Professor of Finance, University of Liverpool; Gabriella Legrenz,Senior lecturer in economics, Keele University

Statement from the Governor of the Bank of England following the EU referendum result

Statement from the Mark Carney, Governor of the Bank of England

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. There will be no initial change in the way our people can travel, in the way our goods can move or the way our services can be sold. And it will take some time for the United Kingdom to establish new relationships with Europe and the rest of the world.

Some market and economic volatility can be expected as this process unfolds. But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning. The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward. These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years.

The capital requirements of our largest banks are now ten times higher than before the crisis. The Bank of England has stress tested them against scenarios more severe than the country currently faces. As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets. Why does this matter? This substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to UK businesses and households, even during challenging times. Moreover, as a backstop, and to support the functioning of markets, the Bank of England stands ready to provide more than £250bn of additional funds through its normal facilities. The Bank of England is also able to provide substantial liquidity in foreign currency, if required. We expect institutions to draw on this funding if and when appropriate, just as we expect them to draw on their own resources as needed in order to provide credit, to support markets and to supply other financial services to the real economy. In the coming weeks, the Bank will assess economic conditions and will consider any additional policy responses.

Conclusion. A few months ago, the Bank judged that the risks around the referendum were the most significant, near-term domestic risks to financial stability. To mitigate them, the Bank of England has put in place extensive contingency plans. These begin with ensuring that the core of our financial system is well-capitalised, liquid and strong. This resilience is backed up by the Bank of England’s liquidity facilities in sterling and foreign currencies. All these resources will support orderly market functioning in the face of any short-term volatility. The Bank will continue to consult and cooperate with all relevant domestic and international authorities to ensure that the UK financial system can absorb any stresses and can concentrate on serving the real economy. That economy will adjust to new trading relationships that will be put in place over time. It is these public and private decisions that will determine the UK’s long-term economic prospects. The best contribution of the Bank of England to this process is to continue to pursue relentlessly our responsibilities for monetary and financial stability. These are unchanged. We have taken all the necessary steps to prepare for today’s events. In the future we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.

Brexit rocks Australian sharemarket, worse to come

From The Conversation.

The UK has voted to leave the European Union but even before all the votes were counted volatility made its way across Asian markets and to Australia.

The S&P ASX200 has finished 3.3% down at the close, wiping off approximately $50 billion in value, while the Australian dollar has dropped 3.4% to 73.4 US cents.

Richard Holden, Professor of Economics at UNSW says the volatility is likely to continue at least for another 24 hours.

“We could see volatility, perhaps not as extreme as the current levels, for a really extended period of time,” Professor Holden says.

One of the major factors in this will be how affected UK banks and therefore Australian banks will be by this decision, as they rely on short term funding for their operations.

“If those markets start to dry up and there’s uncertainty about their funding getting rolled over, one day to the next, then that’s when things can go pear shaped within an incredibly short period of time,” he adds.

The position of hedge funds, banks and other financial institutions in betting on currencies in over-the-counter markets (not regular currency markets) in times like this, also adds to the uncertainty.

“Basically we don’t know, what we don’t know and suddenly there’s a liquidity crunch and someone gets into trouble and that has flow-on effects like we saw in 2008,” Professor Holden says.

The S&P ASX200 index closed -3.3% following the Brexit vote. S&P ASX 200

He also warns that a drop in the Australian dollar shows that money could flow out of Australia and back to the UK as financial institutions there change their positions.

In the longer term, Brexit could affect the way Australian companies trade with the European Union through the UK.

“All of a sudden that’s going to be more complicated, it’s going to have to go through under some new trade agreement and we know that a series of bilateral trade agreements are always more complicated and have more nuance than large multilateral trade agreements,” Professor Holden says.

All this comes as Australia goes into the last week of an election campaign and this volatility will keep economic management top of mind for Australian voters.

“I don’t think either side of politics in Australia has an exclusive right to say they are going to be the best economic managers, I guess we’ll have to wait and see about that as well.”

Jenni Henderson, Assistant Editor, Business and Economy, The Conversation Interviewed Richard Holden,Professor of Economics, UNSW Australia