Bank of England in last-ditch Brexit warning as it holds interest rates

Jake Cordell
Follow Jake
Mark Carney has been adamant about the Bank's role in needing to discuss referendum risks (Source: Getty)

Brexit is not only the most serious threat to the UK economy, but it is potentially the biggest risk to global financial stability, the Bank of England said today in another warning ahead of next week’s In/Out vote.

Amid signs referendum nerves have shaken markets to their core, the Bank said volatility looks set only to accelerate if the UK votes to leave the European Union. The comments came as the Bank unveiled more details on the contingency planning it is undertaking to deal with the fallout from a Leave vote.

“The outcome of the referendum continues to be the largest immediate risk facing UK financial markets and possibly also global financial markets,” the Bank said today as its monetary policy committee (MPC) voted unanimously to hold interest rates at a record low of 0.5 per cent for yet another month.

The warnings are the latest escalation in Threadneedle Street’s campaign pointing out the damage a vote to leave the EU could inflict on the economy. In the last scheduled policy meeting before the 23 June vote, the MPC chose to hype up the danger the fallout could not be contained to the UK, in its strongest words yet about the global risks of Brexit.

The Bank said it “was clear that the EU referendum was having an influence on financial markets, with evidence that changes in the likelihood of a Leave vote was having an increasingly widespread impact on asset prices”.

Analysts in Threadneedle Street confirmed the widespread view financial markets were moving up and down in response to referendum news.

“On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply,” the MPC noted.

However, the reaction of markets to referendum opinion polls was not limited to the UK. The Bank’s top officials noted “evidence of an influence of the EU referendum beyond sterling markets”, with European stocks falling and Germany's government borrowing costs crashing into negative territory - their lowest ever level.

Read more: City A.M.’s Shadow MPC votes unanimously to hold rates

Words of caution from both the US Federal Reserve chair Janet Yellen and European Central Bank (ECB) president Mario Draghi in the last week have sharpened the Bank’s focus on the need to contain the immediate market reaction to a vote for Brexit.

The Bank said it will keep open “swap lines” with other central banks so big UK and foreign lenders could get their hands on - or off - sterling in the minutes after the vote. This is crucial, the Bank said, to ensuring markets do not seize up due to a lack of liquidity.

It was also revealed the Bank’s supervisory arm, the Prudential Regulation Authority (PRA) has also started a “more intensive supervision … of major financial institutions to ensure they had sufficient liquidity, including in foreign currencies”.

Read more: Carney clashes with Bernard Jenkin over Old Lady’s independence

The warnings will not please Leave campaigners, who have been ramping up their own attacks on the Bank of England and questioning the independence of governor Mark Carney.

This morning four Conservative grandees - former chancellors Norman Lamont, Nigel Lawson and ex-leaders Iain Duncan-Smith and Michael Howard wrote in a letter to The Telegraph:

“There has been startling dishonesty in the economic debate, with a woeful failure on the part of the Bank of England, the Treasury, and other official sources to present a fair and balanced analysis.”

Related articles