Jane Foley, Research Analyst at Rabobank, notes that the BoE yesterday announced that it will offer three additional long-term repo operations in the weeks around the EU referendum on June 23.
Key Quotes
“The Bank is clearly taking measures to ensure that liquidity remains adequate to cope with any extraordinary demands that the banks may face in the event of a Brexit. The Bank had planned for two similar operations after the 2014 Scottish referendum, although the Bank chose to only make this known after the vote. It can be argued that by pledging that it is ready to provide liquidity the BoE is merely fulfilling a primary central bank function.
According to some commentators, however, the Bank’s readiness to act has served to stoked fears that a Brexit could cause market turmoil (The Guardian). BoE Carney had previously made it clear that the Bank was preparing contingency measures should the UK vote to leave the EU, but up to now there have been few details as to what these plans may encompass.
Last October BoE Governor Carney delivered a speech titled “European Union, monetary and financial stability, and the Bank of England”. He was careful not to stray too far into politics and warned that the Bank’s report “is not a comprehensive assessment of the pros and cons of the United Kingdom being in Europe.” That said, Carney did say that that “cross-border integration of goods, services, labour and capital markets increases an economy’s dynamism through increased specialisation, enhanced competition, and greater possibilities for diversification and risk-sharing” He also remarked that “the evidence suggests that UK has successfully harnessed the benefits of openness afforded by its EU membership while avoiding some the drawbacks of reduced flexibility from which some continental European economies suffer.”
Following the speech the press suggested that Carney was a ‘Eurosceptic’ (The Telegraph) and announced that he ‘backs Britain’s membership of reformed EU’ (FT). At his appearance at a parliamentary committee this morning Carney reiterated several times that the Bank was not taking a view on whether the UK should remain in the EU. However, he was accused by one MP of making speculative pro-EU comments. In response Carney cited research referring to the growth of UK trade with the rest of Europe within the common market.
Having been knocked sharply lower in the middle of last month by Brexit fears, GBP has been recovering some lost ground since the start of last week. The better tone of the pound would appear to hint at a drop in uncertainty connected with the referendum. This, however, is inconsistent with the results of opinion polls.
Polls released since the EU reform deal and Mayor Johnson’s announced his position last month have shown differing results. That said, the EU Poll of Polls published by ‘What UK Thinks’ has consistently indicated that the Remain camp remains ahead by a comfortable margin. The combined result from polls conducted between February 24 and March 3 show that the ‘Remain’ vote is ahead with 51% of the vote vs. 49%.
That said, the lead of the ‘Remain’ vote has shrunk. The average of six polls between February 13 and 25 indicated that the ‘Remain’ vote was ahead with 55% vs. 45%. Given reports that the amount of undecided voters is still large, the UK’s EU vote could still go either way. On the basis that the political uncertainty is a currency negative factor, we continue to see downside risk for sterling on a 3 mth view. Our forecasts that GBP can recover to GBP/USD1.50 and 0.70 on a 12 mth view assumes that the June 23 referendum will result in a ‘Remain’ vote.”
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