The Economy

Brexit Could Put A Serious Dent In Global Economy

The Bank of England expects the exchange rate of sterling to fall further, 'perhaps sharply,' if Britain votes to leave the EU.
Katie Kuehner-HebertJune 16, 2016

Brexit could put a serious dent not only in the United Kingdom’s economy, but also global financial markets, the Bank of England said Thursday.

In its monthly report that officials had voted unanimously to maintain benchmark interest rate at 0.5%, the U.K. central bank said that if next Thursday’s referendum to leave the European Union were to pass, the sterling’s exchange rate would likely fall further, “perhaps sharply.”

Moreover, the country’s short-term interest rates and measures of U.K. bank funding costs appeared to have been materially influenced by opinion polls about the referendum.

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“These effects have also become evident in non-sterling assets: market contacts attribute much of the deterioration in global risk sentiment to increasing uncertainty ahead of the referendum,” the central bank wrote. “The outcome of the referendum continues to be the largest immediate risk facing U.K. financial markets, and possibly also global financial markets.”

“Through financial market and confidence channels, there are also risks of adverse spillovers to the global economy,” BOE wrote.

Financial markets across the world have been rattled due to the uncertainty of the Brexit vote, with recent polls showing the “Leave” campaign winning the vote, according to The Wall Street Journal. Fed Chairwoman Janet Yellen said Wednesday the British vote was “a factor” behind the Fed’s decision to leave short-term interest rates unchanged this month.

Proponents of Brexit said that the central bank’s concerns were overblown, “and that the U.K. would flourish outside the EU once free of burdensome EU regulation and able to ink its own trade deals with the rest of the world,” the WSJ wrote.

They are also upset with BOE Governor Mark Carney’s assessment on behalf of the central bank, “saying that he has strayed into political waters he should avoid as a central banker independent of government.”

In a letter to one such “euroskeptic,” U.K. lawmaker Bernard Jenkin, Carney wrote that all of the public comments that he and other bank officials have made regarding issues related to the referendum have been limited to factors that affect the bank’s statutory responsibilities.

In other Brexit news, a survey of about 1,500 global dealmkers by Intralinks, a data room provider, found that 65% thought the value of European assets would be negatively affected if Britain voted to leave the European Union.