Brexit: Central bank comes to the rescue – Goldman Sachs

Research Team at Goldman Sachs, had expected the BoE to stand behind markets and to maintain market functioning and Mr Carney's statement on Friday focused on that message.

Key Quotes

“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.

We expect 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. 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.

We expect a 25bp cut in the Bank's policy interest rate at (or before) the August MPC meeting. A cut in Bank rate alongside the August Inflation Report would communicate a policy of ‘looking through’ a period of above-target inflation owing to a sharp weakening in Sterling. This is likely to imply extending the MPC’s policy horizon for returning inflation to target to “around 3 years”.