BOE steps up preparations for possible Brexit
The Bank of England will draw on lessons learned from the Scottish referendum and the global financial crisis as it steps up its preparations for a possible decision by Britain to leave the EU on 23 June.
The first of three special funding operations by Threadneedle Street will be launched on 14 June to ensure the UK’s commercial banks have the necessary cash to cope with any turmoil caused by the uncertainty surrounding a Brexit vote.
The move would be just the start of action by the Bank, which has drawn up a plan ready for use if necessary on 24 June if the UK votes to leave the EU.
There would be emergency meetings of both the Bank’s main decision-making bodies; the monetary policy committee that sets interest rates and the financial policy committee that is charged with ensuring there is no repeat of the near-meltdown that occurred during the banking crisis of eight years ago. Both bodies are chaired by the Bank’s governor, Mark Carney, who would play a pivotal role as the government tried to convince jittery markets, nervous investors and the general public that it was in control of events.
A key decision would be whether to raise interest rates in order to prevent a falling pound leading to higher inflation, or whether to ease policy – either through a cut in the cost of borrowing or through an expansion of the Bank’s £375bn quantitative easing programme – to support growth.
Speaking at a press conference to launch last month’s inflation report, Carney said the decision could go either way. “In such circumstances [Brexit], the MPC would face a challenging trade-off between stabilising inflation on the one hand, and stabilising output and employment on the other. The implications for monetary policy would not be automatic; its direction would depend on the relative magnitudes of the demand, supply and exchange-rate effects.”