The governor of the Bank of England has stepped forward to calm financial markets after the Brexit vote sent the pound to its lowest level since 1985 and at one point wiped £120bn off the value of Britain’s leading shares.
Amid fears that it could spark a fresh global financial crisis, Mark Carney said Threadneedle Street was ready to do whatever was needed to mitigate the impact of Britain’s vote to leave the EU. City traders quickly responded by placing bets on an interest rate cut by the end of the year.
The governor will be discussing the vote and the potential blow to trade, spending and financial stability with fellow central bankers at their scheduled meeting in Basel this weekend.
Within hours of the leave victory being confirmed, the chancellor, George Osborne, was briefing his fellow finance ministers from the G7 group of leading economies. As fears grew about his predictions of a Brexit-induced recession becoming a reality, more assurances came from the International Monetary Fund, the European Central Bank and the US Federal Reserve.
In the first live televised statement by a Threadneedle Street governor, Carney said on Friday: “We are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the chancellor and I have been in close contact, including through the night and this morning.”
His comments came on a dramatic day for financial markets. After initial opinion polls on Thursday night signalled a remain victory, the pound had rallied to $1.50 against the dollar. But as results came in through the night, investors who had bet on a vote to stay in the EU scrambled to sell sterling. The currency tumbled more than 10% to as low as $1.32. Even after those losses were trimmed in later trading, at $1.36, it was still at its weakest for 31 years amid fears for Britain’s economic outlook.
“UK voters have opted for Brexit. If fully followed through, this will be an act of economic self-harm with global ramifications,” said Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics.
On stock markets, which had rallied in the run-up to the vote on misplaced optimism about a victory for remain, there were sharp falls. Banking shares were left nursing losses not seen since the collapse of US investment bank Lehman Brothers in the financial crisis of 2008.
The global stock market rout was costly for the UK’s 15 richest individuals, who between them lost £4bn during the day, according to news organisation Bloomberg’s billionaire index. Britain’s richest person, Gerald Grosvenor, the Duke of Westminster, led the decline with a loss of £727m, followed by Topshop owner Philip Green, fellow land baron Earl Cadogan, and Bruno Schroder of money manager Schroders.
In heavy trading volumes, the FTSE 100 fell 500 points in the first few minutes of trading – wiping more than £120bn off share values. The index of leading shares later recovered much of the lost ground to close down 199 points, or 3.2%, at 6,139, which represented a loss of £52bn on the previous day. Despite Friday’s gyrations, the FTSE 100 finished up about 2% on the week.
Other European bourses suffered much bigger losses amid concerns both about the political and finacial consequences of Brexit for the rest of the EU. Italy, where some banks are thought to be vulnerable, suffered its biggest one-day stock market loss on record. The 12% fall in Milan was mirrored in Madrid, where the mood was tense ahead of an election on Sunday.
On Wall Street, the Dow Jones industrial average fell 611.21 points, or 3.4%, to 17,399.86. The Standard & Poor’s 500 dropped 76.02 points, or 3.6%, to 2,037.70. Both indexes took their biggest loss since August.
In the UK, much of the focus was on Lloyds Banking Group, where 1bn shares changed hands, or as much trade in one day as usually takes place in 10. Speculation was also mounting that the government would have to put on hold its efforts to sell the rest of its 9% stake in the bailed-out bank for now.
Carney insisted that lessons had been learned from the global financial crisis and the collapse of big financial institutions, with the Bank of England ready to pour £250bn into the market to avoid a credit crunch.
The Bank was in contact with all the big players in the City throughout the night, and shortly after the market opened they each issued statements intended to quash any concerns about their financial health.
Those who had campaigned for a leave vote sought to underscore the new opportunities for the UK and its businesses.
Gerard Lyons, a member of the Economists for Brexit group, said: “Carney’s comments were reassuring and sensible. I think we should avoid a recession. Lower interest rates and a weaker pound will help the economy self-stabilise.”
But at the same time there were myriad warnings about the UK’s standing on international markets. Credit ratings agency Standard and Poor’s warned Britain’s top “AAA” credit rating was now at risk. Ratings agency Moody’s cut its outlook on the United Kingdom’s long term debt to negative from stable, although it maintained its stable outlook on the EU. Moody’s said the Brexit vote will bring about a period of uncertainty for the UK, with negative implications for the country’s medium-term growth outlook.
There were also fears that the planned $30bn merger between Germany’s Deutsche Börse and the London Stock Exchange could collapse following the leave decision.
Amid all the market turmoil there were some winners. Gold, a long-standing haven for investors in uncertain times, rose as much as 8%.
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