Ready for Brexit shocks

Eurozone financial chief Jeroen Dijsselbloem sought Thursday to reassure markets that the bloc is ready to deal with the fallout from a possible "Brexit", despite warnings from key central bankers of great risks posed by the British vote.

Uncertainty ahead of the June 23 referendum on Britain's EU membership has triggered a rush to safety with investors dumping shares while shifting their funds into safe-haven currencies and government bonds instead.

"We are considering possible scenarios," said Dijsselbloem, leader of the Eurogroup of finance minsters from the 19 EU nations that share the euro currency.

"We have the capacity to deal with any shocks that might occur," Dijsselbloem, who is also Dutch finance minister, added.

But his confidence appeared at odds with the views of top central bankers who expressed concerns over the consequences of a possible British pullout from the European Union.

After the US Federal Reserve kept its key rates steady overnight, the Bank of Japan held fire on fresh stimulus measures. Likewise, the Swiss National Bank left its rates unchanged.

The reason cited by all three: the expected fallout from Britain's referendum.

The Japanese yen jumped to 20-month highs, while the Swiss franc strengthened to 1.08 to the euro.

Bond yields sank, with rock-solid 10-year German government bonds trading in negative territory as investors showed a willingness to accept losses in return for the safety of parking their cash in German debt.

Fed Chair Janet Yellen underlined the significance of the Brexit referendum, saying: "It is a decision that could have consequences for economic and financial conditions in global financial markets".

"If it does so, it could have consequences in turn for the US economic outlook," warned the top central banker of the world's biggest economy.

- 'Significant risk' -

The central bank chief of "small and open" Switzerland, Thomas Jordan, also saw the risks for his country.

"Next week's UK referendum on whether to remain in the EU may cause uncertainty and turbulence to increase. We will be monitoring the situation closely and will take measures if required," he said.

Bank of Japan chief Haruhiko Kuroda would not say if the Brexit vote had influenced the decision of policymakers to hold off from a fresh round of easing. But he said the central bank was "closely watching" the referendum's impact on the global economy.

The central bank directly caught in the eye of the storm -- the Bank of England -- Thursday reiterated the "significant risks" posed by the vote.

"A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy," the bank said as its members voted to keep its lending rate unchanged.

Carsten Brzeski, chief economist at ING bank said it was clear that the uncertainties over which way Britain would swing were "complicating the situation for central banks".

The ECB was already in "crisis mode" battling the threat of deflation, he said.

"It was most difficult for the Fed because it had been seeking to get out of its low interest policy, but the uncertainty had forced it yesterday to hold off," Brzeski said.

- 'Highly tensed' -

Although the result of the vote could remove one uncertainty from the market, it does not mean that the central bankers' jobs would become easier, analysts warned.

"For the ECB, next week will be highly tensed because it may have to intervene directly in the market if there is a Brexit, and if there is turbulence in the market," said Brzeski.

Ben May of Oxford Economics said central banks might issue soothing words but he expected little in the way of immediate action.

May said he would be "very surprised" if the ECB, for example, announced it was boosting its "quantitative easing" programme of massive bond-buying in response to the British referendum.

"I think that would be unlikely unless a few weeks down the line the economy has taken a turn for the worse," he said.

SourcE: AFP