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Bank of England ready to act if Brexit sparks market chaos

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·2-min read
The Bank of England in the City of London, the day after Prime Minister Boris Johnson put the UK in lockdown to help curb the spread of the coronavirus.
The Bank of England in the City of London. Photo: PA

The governor of the Bank of England has said the central bank will not hesitate to intervene in markets if Brexit sparks disruption and disorder.

Speaking to journalists on Friday, Andrew Bailey said the Bank of England would use its “substantial array” of “tools” to help calm markets if needed.

“What’s the Bank of England got in its armoury, as it were? The answer is a lot,” Bailey said. “We will use our tools, as we did in March, should we be in that situation.

“We have a very substantial array of responses that we can make. In any situation like that, we’ll put them to work.”

The UK and EU have set a deadline of Sunday (13 December) to conclude trade talks. Prime minister Boris Johnson warned on Thursday evening that there was a “strong possibility” of talks ending in a no deal Brexit.

Such an outcome could spark sharp moves in the pound and UK equities. Analysts think sterling could fall by as much as 9% if talks end with no deal. The end of the Brexit transition period on 1 January could also bring disruption.

Watch: ECB gives euro zone another shot in the arm

READ MORE: Bank of England says UK banks can withstand COVID-19 and Brexit

Sharp moves in asset prices have the potential to create a run, as investors rush to limit losses and all sell at once. In such a scenario, the Bank of England could help to ease pressure by stepping in to support prices.

In March, amid a global “dash for cash”, the Bank of England stepped in to ease pressure on the pound and government debt. The bank announced it would spend £200bn ($265bn) buying up UK bonds in a bid to calm debt markets. The move came after 10-year government debt experienced its highest-one day jump in yield since 2009 (bond yields rise when prices fall) and sterling dropped to its lowest level against the dollar since 1985.

Bailey did not outline any specific policy measures the Bank of England could use in response to Brexit disruption but referenced the March action.

“Let’s go back to March and the COVID shock,” he said. “That was a period of very disruptive markets.

Bailey added: “Let’s be clear, I’m not predicting that will happen again.”

The comments came as the Bank of England warned about the possibility of market disruption around Brexit. In its biannual financial stability report published on Friday, the central bank said the UK’s financial system was prepared for any Brexit outcome but said financial stability was “not the same as market stability”.

The pound fell by half a percent against the euro on Friday and has fallen by more than 3% over the last month.

Watch: Why can't governments just print more money?