Where is Bank of England?
Having been one of the many institutions that had highlighted the risks of a vote to leave, Carney was now all calm reassurance. Banks would not run short of money, he said. The Old Lady of Threadneedle Street would collaborate with other central banks to ensure there was no market mayhem. UK banks were in much better shape than in 2008, when two of them needed an emergency cash injection from the government.
Put simply, Project Fear is history. It is now time for Project Damage Limitation.
The new approach is certainly needed because there is a risk that consumers and businesses might believe the forecasts of recession made during the referendum campaign by the International Monetary Fund, the Organisation for Economic Cooperation and Development and the Treasury will inevitably come to pass. The Bank’s own prediction was more nuanced but Carney did say before the vote that it was the biggest short-term risk to financial stability.
Some hit to growth looks inevitable. The UK economy was slowing even before David Cameron announced the date of the referendum back in February, and it would come as little surprise were investment decisions to be delayed during a period of heightened political and economic uncertainty.
The impact on consumer spending is harder to judge. In the run-up to the referendum, polls showed that at least two-thirds of voters took the doomladen warnings from the IMF et al with a large pinch of salt. They didn’t believe that they would be worse off by dint of voting for Brexit, which is why many of them did so.
There is also the prospect of action by the Bank of England to soften any blow to either consumer or business confidence. The City is betting on a cut in interest rates from Threadneedle Street’s monetary policy committee and a resumption of its quantitative easing programme to increase the money supply.
There were two other developments that might be of help to get the economy through a difficult patch. The first was the drop in the value of the pound, which will make exports cheaper and provide a boost to industry. The second was that the interest rates paid by the government to finance its own borrowing fell once the outcome of the referendum was announced – confounding George Osborne’s prediction that they would rise.
What does this all add up to? Clearly, the economy is not going to enjoy a purple patch over the coming period. Growth is going to be slower and inflation – courtesy of the weaker pound – is going to be higher. Living standards will take a hit.
But the Treasury’s forecast of recession as a result of Brexit assumed there was no policy response. This looked unrealistic then and it looks even more unrealistic now. There will be stimulus from the Bank and no more talk of an emergency austerity budget. The marked recovery in share prices quoted on London’s FTSE 100 index as the day wore on reflected a sense that recession might be averted.