The Bank of England is consumed with preparing contingency plans for Britain to leave the EU, with staff across its financial stability, monetary policy and regulatory wings ready to calm any turmoil.
In the days leading up to the June 23 poll, the Bank will hold additional auctions of sterling to ensure the banking system has sufficient funds to operate in a potentially chaotic moment.
Three exceptional auctions of cash have already been planned for June 14, 21 and 28. But stuffing the banks full of cash will not prevent foreigners and UK households and companies dumping sterling in the event of a Brexit vote.
Michael Saunders, the new member of the bank’s Monetary Policy Committee, expects the pound to come under severe pressure. While still at Citi, he wrote that Brexit risks were “nowhere near priced yet”, adding that Britain should expect a 15 to 20 per cent depreciation of sterling against Britain’s main trading partners.
If such a decision to flee sterling leads British banks to become short of foreign currency, the BoE will rapidly offer foreign currency loans to the financial system, using swap lines with other central banks still in existence from the financial crisis.
Philip Shaw of Investec said that using such swap lines would be needed only in “fairly extreme circumstances” and the BoE would also need to “make reassuring noises about the soundness of the financial system” to help shore up confidence.
Officials are already pointing to the 2014 stress test of banks, which assumed a reassessment of the health of the UK economy led to a “depreciation of sterling”, to suggest that the banking system would cope.
Dealing with the extreme uncertainty of Brexit is not what most senior BoE officials want and some are already complaining about the risk to their summer holidays, but they cannot say this publicly as the central bank has promised to remain neutral in the referendum campaign.
Full article: Bank of England busy preparing for Brexit vote (Financial Times)
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