Financial markets “vastly underestimated” the outcome of Britain’s vote to leave the European Union but did not panic on Friday, International Monetary Fund Managing Director Christine Lagarde said on Sunday.
Lagarde told a forum at the Aspen Ideas Festival in Colorado that central bankers “did their job” by ensuring that ample liquidity was available, and policymakers worked to reassure market participants that the “situation was under control. And it was under control.”
“There was a violent, brutal, immediate massive move, the pound went down by 10 percent,” Lagarde said in Aspen. “But there was no panic and the central bankers did the job that they were prepared to do just in case, which was to put a lot of liquidity on the markets.”
There were no market liquidity problems on Friday like those experienced in 2008 during the worst part of the financial crisis, she said.
Lagarde, however, said that how markets react from here depends on what steps UK and European policymakers take to deal with the separation vote and limit uncertainty.
“At this point in time, policy makers both in the UK and in Europe are holding that level of uncertainty in their hands. How they come out in the next few days is going to really drive the direction in which risk will go,” Lagarde said.
She said policymakers and multilateral institutions needed to work cooperatively to deal with the implications of the Brexit vote, and noted that only Britain can trigger the formal divorce proceedings — European politicians cannot force their hands.
“We have strongly encouraged to actually proceed with this transition in the most efficient, predictable way in order to reduce the level of uncertainty which will in itself determine the level of risk,” she said.