If there is one thing that was clear amidst Friday market’s turmoil, it was that the Pound stopped falling and the Yen stopped rising around the time Bank of Japan governor Kuroda said that the globe’s largest central banks would work together to do their utmost to backstop markets with liquidity and as a result, ensure stability.
This comment was followed up hours later by Bank of England Governor Mark Carney and his colleagues at the ECB and other central banks.
Those comments and actions mean central banks have got the market covered according to Andrew Benito, senior European economist at Goldman Sachs. Benito wrote in a note Friday in the aftermath of Britain’s decision that:
We had expected the BoE to stand behind markets and to maintain market functioning today. Mr Carney’s statement this morning focused on that message. Our view was that Governor Carney would activate swap lines agreed with other major central banks, including the Fed and ECB. In his statement, Governor Carney indicated that the BoE can provide substantial liquidity in foreign currency “if needed“. These announcements are intended to mitigate foreign exchange volatility and support bank funding, including foreign currency funding. Many of these facilities were put in place in response to earlier market tensions.
As part of these measures, he said that Goldman expects “further policy easing to be announced by the BoE at its July 14 MPC meeting, focused on credit easing measures. We expect a programme of asset purchases to be announced focused on (non-bank) corporate debt”.
Goldman also believes the BoE will backstop bank funding costs -– a crucial circuit breaker to avoid a LTCM or Lehman rerun. Benito said “should bank funding costs rise, as seems quite likely, we would also expect the BoE and HM Treasury to announce an extension of the Funding for Lending Scheme”.
“Such policies support domestic demand in the event of a loss of domestic confidence and yet do not contribute to a more severe weakening in Sterling,” Benito wrote.