Sunday, June 26, 2016

Central banks on emergency standby with Brexit fallout set to escalate

Central banks around the world are standing by to intervene amid fears that the global fallout from Britain's exit from European Union will escalate in the coming days.

Listen to my report broadcast on The World Today

The Bank for International Settlements - known as the central bank of central banks - is warning of a "period of uncertainty and adjustment" given Britain's status in the global economy and the impact of it withdrawing from the EU.

The bank's general manager Jaime Caruana says "extensive contingency plans" are in place by central banks and the private sector to limit market disturbances such as the shock Brexit decision.

"Central banks have already communicated that they are closely monitoring the situation and stand ready to take the necessary actions to ensure orderly market functioning," Mr Caruana said at the Bank's annual general meeting in Basel, Switzerland.

"Central banks have acted swiftly in the past. They stand ready to act again, and they have the tools."

The Australian sharemarket is set to open 0.1 percent higher tomorrow (Monday) after losing $50 billion in value as part of a global selloff.

The Bank of England moved swiftly after the Brexit outcome and announced it was ready to provide A$460 billion in liquidity to help calm currency and equity markets which went into free fall.

Bank of England governor Mark Carney - who had previously warned a "leave" vote would have serious economic consequences - declared he would take "all necessary steps" to ensure financial and monetary stability.

In Australia, the Reserve Bank provided a briefing to both the government and the opposition under caretaker conventions in the leadup to the Brexit referendum.

In its annual report released on Sunday evening Australian time - but written before the Brexit shock - the BIS pointed to "the declining impact of monetary policy" on domestic economies eight years after the Lehman Brothers collapse.

The BIS calls for "stability oriented monetary policy" and that policy makers should take financial stability into account at all times "during both booms and busts".

"We need policies that we will not once again regret when the future becomes today," the BIS warns.

The BIS message comes against the backdrop of slowing global growth, low inflation, falling commodity prices and concerns that traditional central bank tools like quantitative easing are not working.

In comments made with the release of the annual report, Jaime Caruana said despite deleveraging in the private sector problems were building elsewhere.

"Signs of unsustainable financial booms began to appear especially in emerging market economies," Mr Caruana said.

Mr Caruana urged a global rebalancing to deal with what he called a a pattern "similar to that of previous boom episodes".

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