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.
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.
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.