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23/05/2016

Bank of England issues new Brexit warning

UK & Europe

Bank of England issues new Brexit warning

The Bank of England, in London's City of London financial district, photographed during a public open day.

[MarkOliver/Flickr]

Uncertainty surrounding Britain’s looming referendum on European Union membership could send the pound slumping further and boost financing costs, the Bank of England warned Tuesday (29 March).

The central bank’s Financial Policy Committee (FPC) declared that the risks surrounding the vote represented “the most significant near-term domestic risks to financial stability”, echoing recent comments from BoE governor Mark Carney.

Britons are set to vote in a crucial referendum on June 23 to decide whether to back a so-called Brexit – or exit from the European Union.

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Uncertainty over the outcome could spark a “further depreciation” in sterling, the FPC warned in minutes from its March meeting, adding it could also adversely affect “the cost and availability of financing for a broad range of UK borrowers”.

In late February, the pound had tumbled to a near seven-year low against the dollar on mounting fears that Britain could leave the 28-member EU bloc.

The FPC cautioned on Tuesday that the nation’s potential EU withdrawal could “spill over” into the eurozone — and weigh on the currency bloc’s growth prospects.

It added that the outlook for Britain’s financial stability had “deteriorated” since its previous meeting in November, citing increasing global economic risks and the threat of Brexit.

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However, the FPC noted Britain’s major banks had passed stress tests designed to show their ability to survive a severe economic shock, such as a sharp drop in sterling or a prolonged recession.

Earlier this month, the Bank of England announced it would make extra cash available to banks around the time of the referendum, in order to help overcome market turbulence and the risk of another credit crunch.

Carney had already warned on March 8 that Britain’s departure from the EU would create the “biggest domestic risk” to the nation’s financial stability.

Background

During his campaign fro re-election in 2015, British Prime Minister David Cameron promised to renegotiate the UK's relations with the European Union and organise a referendum to decide whether or not Britain should remain in the 28-member bloc.

The British PM said he will campaign for Britain to remain in the EU after a two-day summit in Brussels where he obtained concessions from the 27 other EU leaders to give Britain “special status” in the EU.

But EU leaders had their red lines, and ruled out changing fundamental EU principles, such as the free movement of workers, and a ban on discriminating between workers from different EU states.

The decision on whether to stay or go could have far-reaching consequences for trade, investment and Great Britain's position on the international scene.

The campaign will be bitterly contested in a country with a long tradition of euroscepticism and a hostile right-wing press, with opinion polls showing Britons are almost evenly divided.

Timeline

  • 23 June: Referendum.
  • July-December 2017: United Kingdom holds rotating EU Council Presidency.