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Central banks move to reassure markets after Brexit

Saturday, June 25, 2016 - 07:30
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The world's major central banks rushed on Friday to deal with financial markets chaos arising from Britain's shock referendum decision to quit the European Union.

[LONDON] The world's major central banks rushed on Friday to deal with financial markets chaos arising from Britain's shock referendum decision to quit the European Union.

Britain has voted to leave the EU by 52 per cent to 48 per cent, sparking markets turmoil and the resignation of Prime Minister David Cameron - who had backed the failed "Remain" campaign.

The news sparked a raft of announcements from the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the US Federal Reserve, as they clambered to curb dizzying global stock market losses.

The announcements stemmed losses on major European and US markets, with London falling just 3.2 per cent, although Frankfurt fell 6.2 per cent and Paris 8.0 per cent.

But Madrid and Milan closed down more than ten per cent down on jitters ahead of weekend Spanish elections.

Wall Street was down around 3 per cent in afternoon trading.

"The liquidity support promised by the Bank of England - and subsequently the ECB and Federal Reserve - appears to have been the main catalyst for the turnaround," said Spreadex analyst Connor Campbell.

In reaction to chaotic trade, the BoE swiftly announced that it was ready to pump £250 billion (S$462.8 billion) to aid the smooth running of markets, declaring it will take "all necessary steps to meet its responsibilities for monetary and financial stability".

"As a backstop, and to support the functioning of markets, the Bank of England stands ready to provide more than £250 billion of additional funds through its normal facilities," BoE governor Mark Carney said in a televised statement following the Brexit vote.

"The BoE is also able to provide substantial liquidity in foreign currency, if required." The British central bank added that it had already "undertaken extensive contingency planning" and was working closely with Britain's Treasury as well as with other domestic authorities and key central banks.

The European Central Bank separately said that it was on stand-by to open the liquidity floodgates if needed.

"Following the outcome of the UK referendum, the ECB is closely monitoring financial markets and is in close contact with other central banks, it said in a separate statement.

"The ECB stands ready to provide additional liquidity, if needed, in euro and foreign currencies." The Bank of Japan said it stood ready to work with other major central banks to inject ample liquidity to counter wild volatility in markets.

And the Federal Reserve added it was "prepared to provide dollar liquidity through its existing swap lines with central banks... to address pressures in global funding markets, which could have adverse implications for the US economy".

Britain's decision to leave the EU - following a bitterly-contested referendum - has rocked global stock markets and sent the pound crashing to its lowest level in more than three decades.

Brexit could also force the BoE to act urgently to prop up the British pound with intervention in the foreign exchange market.

The central bank governors of the G7 nations - comprising the United States, Canada and Japan as well as Britain, France, Germany and Italy - said in a joint statement that they "stand ready" to provide needed liquidity.

"We recognise that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.

"G7 central banks have taken steps to ensure adequate liquidity and to support the functioning of markets. We stand ready to use the established liquidity instruments to that end," they added.

The statement followed a conference call among officials from the Group of Seven leading economies to discuss Friday's historic vote results.

Switzerland's central bank added that it had "intervened" in the foreign exchange market to stabilise the Swiss franc, considered a safe haven currency, following the Brexit verdict.

Leaders of major central banks will have the chance to discuss how to handle volatility surrounding Brexit at a three-day conference hosted by the ECB that opens in Sintra, Portugal on Monday.

ECB chief Mario Draghi, Janet Yellen of the US Federal Reserve and the Bank of England's Mark Carney will be at conference.

AFP

For more coverage of the EU referendum, visit bt.sg/BrexiT