Andrew Benito, Research Analyst at Goldman Sachs, suggests that while they expect the UK to vote to remain in the EU in the n June 23 referendum, they address how the BoE would respond to a surprise vote to leave the EU.
Key Quotes
• “Brexit would, in our view, weaken the GDP growth outlook and weaken Sterling, in both cases quite significantly. The fall in Sterling would owe to a further loss of confidence among foreign investors.
• The BoE’s policy response would be geared towards maintaining monetary and financial stability.
• We would expect the BoE to state that it will do whatever is necessary to maintain monetary and financial stability. This would be accompanied by the provision of ample term funding for banks as a first line of defence – a step which would support both financial and monetary stability.
• We would expect the announcement of credit easing measures – the Funding for Lending Scheme (FLS) and/or direct purchases of corporate debt, particularly if there were signs that bank funding costs were rising and/or corporate credit spreads were widening. Since the start of the year, we have argued that the prospect of such credit easing measures from the BoE has increased notably.
• In our view, the MPC would not initially lower Bank Rate on a vote for Brexit, since the BoE would not want to present weaker Sterling as a ‘one way bet’. A rate cut would become a more likely option as the currency stabilises, while the outlook for inflation remains subdued amid a weaker outlook for activity.”
(Market News Provided by FXstreet)