Brexit: Limited BoE and ECB Responses?

Posted June 30, 2016 by rvillareal

Summary Highlights

• The uncertainty facing the UK economy is made all the more intense by the simple fact that the Brexit camp which won the EU referendum clearly has no plan of how it would like the UK to proceed from here. What is clear is that nothing definitive (eg the triggering of the so-called Article 50 of the Lisbon Treaty which governs how and when a country may exit the EU) will occur until a new prime minister is elected something that now may happen by September 9. 
• Very likely there will be negative economic consequences from the markedly heightened uncertainty. The UK economy is likely to see a clear slowing, the question being the extent to which the unfolding slump in the pound boosts competiveness more than it damages spending power. This could mean the UK avoids recession.
• The bottom line is that even if the BoE were able to ease policy further, it may do only modestly; and a 25 bp rate cut will make little difference.  The BoE is likely to keep its ammunition dry for the moment with stable policy expected at the looming MPC meeting on July 14.
• No further easing is likely from the ECB, although the central bank may yet be forced to use the OMT program if peripheral bond markets show clearly damage from the Brexit vote!  This is still considered unlikely, at this juncture.