EU Referendum: Bank of England Will Inject Billions into Financial System

The bank is able to provide cash to major banks during the referendum to ensure that money continues to circulate

The Bank of England is ready to inject billions into the financial system if there is confusion following a vote to leave the European Union in June.

Bank’s Governor Mark Carney will be questioned by MPs on the potential impact of a Brexit on the money markets on Tuesday. The bank is able to provide cash to the major banks during the time of the referendum to be sure that money continues to circulate through the system.

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The same type of emergency action was taken during the 2008 financial crisis and the Scottish independence referendum in 2014, though in this case they were not implemented.

The executive director of Stronger In, Will Straw, views the Bank’s prepared actions as heightening the risk that Britain will vote to leave EU.

According to Straw, Britain is safe and powerful in EU, while outside of it Britain will be on an uncertain path.

Major banks expressed worry on the possible consequences of leaving the EU.

Barclays wrote last week that the referendum on EU membership triggers political uncertainties and increases the chances of an unruly and doubtful exit from the EU, with related ramifications for investment and confidence.

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According to the annual report from the Royal Bank of Scotland, the referendum raises economic and operational skepticism, noting that it may even cause political uncertainties concerning Scottish independence.

Presented below are the major points from the BoE Governor Mark Carney’s letter on EU membership. The letter outlines the impact of EU membership on the Bank of England’s capacity to fulfill its objectives:

 

  • EU membership strengthens the effectiveness of the UK economy to the extent that it raises economic and financial flexibility. This will make the economy more resilient to shocks, and also increase the growth rate without producing inflationary pressure or causing risks to financial strength.
  • High economic and financial openness make the UK economy more vulnerable to economic shocks form abroad.
  • EU Rules and Regulations define several policy instruments of the Bank of England, especially concerned with financial strength.

 

According to the report, EU membership has probably raised the dynamism of the UK economy and thus its capacity to grow without producing risks to the bank’s key objectives of monetary and financial solidity.

However, on the other hand, higher openness to the EU had likely heightened the external challenges to the UK’s monetary and financial strength, as was experienced during the euro crisis.

 

 

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