Brexit Vs Bank of England
Ever since Brexit took the financial world by storm, wreaking havoc on British finances and its economy, people have wondered what the Bank of England, or BoE, can do about it in terms of solving the dilemma and mitigating the results. For a while, the pro-EU outcome seemed so certain that nobody was even considering contingency scenarios, which resulted in quite a mess after the results came in. With political instability looming over the horizon and the Pound standing on flimsy legs, let us see what the Bank of England has in store.
The original reaction seems to be a mild one, with the Bank of England reducing the interest rates to an even lower level. However, at this point it would only add to the uncertainty as ordinary citizens, investors and financial markets alike were hoping for massive, tectonic movements in order to curb what seemed like a monumental and Earth-shattering event. The interest rates had already been at the lowest point when Brexit became a thing, and now it seems that cutting them in half may not be enough to get the job done.
Benchmark Bank Rate is Going Down
In a few days, the British central bank is expected to further reduce the benchmark Bank Rate to a quarter of a percent, as it is currently only one half of a single percent and deemed too high. As for the program for buying bonds, it seems it will have to wait for now. Of course, eliminating the bank rates altogether at this point seems just as appropriate as reducing them to a token number, although there is probably a reason behind this move as well.
It seems the psychological effect is given a great deal of importance here, so the actual bank rates had to stay, even if merely in a symbolic form. To abolish them entirely would likely alarm the markets once again, triggering another (over) reaction. This move would likely hurt banks rather than help them, as analysts and investors alike would interpret it as a beginning of a wide scope of far-reaching measures and switch to damage control once again. This way, the banks will retain some level of control over the situation, but will that be enough?
Probably not, as confidence in public institutions in Britain is far from satisfactory, and this response from the central bank seems anything but calibrated and coordinated. Most likely, the markets are going to interpret their move as a sign of concern on their part, especially about the mounting inflation. They are going to seem desperate to contain the situation, which will make them appear weak, likely triggering the adverse effect from the one they were hoping for.
The Pound Took a Pounding
To say the British pound did not take Brexit well would be an understatement, but it is likely to lose even more of its value after August 4, once these measures are implemented. However, the spiral will likely continue until either the political situation stabilizes or more likely, until the central bank takes more decisive steps toward handling this precarious situation.
Right now, they seem preoccupied with the economy on the whole, stimulating bank lending and bracing themselves for the remainder of the economic tsunami brought about by the popular vote. Most likely, the rationale is that any serious efforts on their part at this point would likely be swept away once the storm hits, so it is better to wait it out and assess the damage afterwards. It is the ordinary people that will have to pick up the pieces and move on, after all. The main problem with this way of thinking is that there is no way to accurately predict the full extent of these changes and effects of Brexit, as well as no way of knowing when they are going to cease. The point is, it could be a while before the proverbial storm blows over, and supplies are running low as it is…
What is even more astounding is that British economy was doing relatively better in comparison to the rest of the EU or even Japan, making the decision to leave the EU and start this whole mess even less rational than ever. Sure, the proponents of Brexit argued that the EU was holding the United Kingdom back and that their country would be far better off on its own, but now that things have been set in motion, there is no clear winner in sight.
The Bright Side
Thanks to its relatively advantageous position at the beginning of this ordeal, the Bank of England did not have to consider immediate damage control in the same way as the Bank of Japan or the European Central Bank, but in time they may have to do just that. The latter two resorted to negative interest rates in order to jumpstart their economies and shock them into action, to varying results.
On the other hand, the United Kingdom has enjoyed one of the most advanced economies with a high growth rate over the last three or four years, and now it seems paralyzed, with recession looming over the horizon and no end in sight. The mighty have not fallen yet, but when they do, it will be hard and painful.
Now the politicians in the United Kingdom and their counterparts from the European Union have to meet up and work out a deal that is (hopefully) beneficial to both parties, if such a thing is even possible anymore. In fact, the choices range from joint efforts to mitigate the economical consequences to self-serving rhetoric that will likely result in one of the most painful divorces in history. One scenario involves a short-lived recession and instability, while the other is far more uncertain, as revanchist and bruised egos collide.
The new trade deal has to be made, and there are two driving forces behind it: the entrepreneurs, urging both sides to concede as much as possible, so that they could continue doing business on the same terms as before, and the populists, which advocate a radically different approach. The latter seem to be in control at this point, at least on the British side, with Boris Johnson, a staunch pro-Brexit supporter taking the office of the Foreign Secretary.
While he remains certain that “Europe will give Britain what it wants” (his exact words), it seems he has already found support in the most likely places: big business in Germany and France is urging their governments to agree to any and all demands, just so they can continue to do business as usual with the UK. Of course, there are opponents of this kind of a deal, which would enable the UK to keep virtually all the benefits of EU membership, without actually being in the EU. After all, if they do it and get away with it, what is to stop other nations from doing the same thing the first chance they get?
It would seem that Mr. Johnson is betting on the influence of major corporations in the EU and their ability to exert pressure on their own governments, thereby doing most of the heavy lifting for him. After all of that is concluded, victorious Johnson would sweep all the laurels and be hailed as a master negotiator, earning his place in history. But what if EU officials insist on the free movement of people and goods in and out of the UK?
After all, the main concern that all but decided the outcome of the referendum was the ability to control their own borders and ban certain people from coming to the United Kingdom to live and work. This will likely be the apple of content between the EU and the UK, with neither side willing to back down. If Johnson were to give in, the majority of people who voted for Brexit will turn on him for betraying their expectations. And everyone else is already crossed at him for advocating Brexit in the first place. On the other hand, a lot of business owners rely on the free flow of people and goods for their livelihood, and their political influence does not fall behind that of Boris’ supporters in the EU.
Either way, everyone wants to do business with UK companies and their economy will benefit from that fact for as long as it is true. This trade deal is the only thing that can determine the conditions under which this business will be taking place, if at all. The Bank of England knows this all too well, and in an attempt to remain unpredictable, they failed to change rates immediately after the Leave campaign won, choosing instead to wait for August and for the heat to subside, as odd as it sounds.
While the impact of Brexit on the economy in the United Kingdom cannot be denied, it is still far too early to tell the extent in which it was affected, as no major surveys have been completed yet. The ones that have been completed, however, indicate a decline in consumer confidence as well as a severe reduction in economic activity, although none of these have been officially confirmed at this point. These preliminary reports and conflicting analysts have not done much to paint a clear picture. Some indicate the worst is behind us, while the others are far less optimistic in their predictions.
Gloom and Doom
As far as manufacturing, construction and services within the United Kingdom go, it seems things are not looking good this week, and it seems as things will get a lot worse before they get better. Their EU counterparts are not doing much better, either, as there are rumours about the European Central Bank being forced to add more stimulus as early as next month just to keep things going. On the other side of the spectrum, it seems the U.S. economy is doing relatively better off, in spite of preliminary figures that indicate a slightly lower growth rate than expected, which is a lot more than anyone else can say at this point.
In fact, governments have taken a much more proactive stance than central banks in this regard. For example, Philip Hammond, Britain’s new minister in charge of finances has gone on record about a fiscal boost after the exact extent of Brexit has been assessed, which should come no sooner than the end of the year.
As a global trend, all major countries in the world are looking at a looser fiscal policy in the near future, at least those who can afford it. As for their governments, their initiative – commendable as it seems – is focused on increasing public spending and tax cuts funded by the so-called helicopter money. The term is used for money issued by central banks for this specific purpose and is never meant to be repaid.
As for the remaining countries, they are likely to stay on their earlier courses, out of sheer inability to change them if nothing else. While Mr. Hammond is trying to assess something that will only be concluded in two years or so, and Mr. Johnson is trying to secure the best deal in UK history, it falls on the Bank of England to salvage the most of the situation, or pick up the pieces, after all is said and done.