World’s economic outlook more uncertain after Brexit vote: ECB

The global economic outlook has become more uncertain after Britain’s vote to leave the European Union, the European Central Bank said on Thursday, reaffirming its readiness to act if needed to support euro zone inflation.

After a spike in volatility in the wake of the June 23 referendum, financial markets have returned to a relative calm, but economists have warned the full economic effect of the Brexit vote may have yet to materialize.

“Financial market volatility following the referendum in the United Kingdom on EU membership has been short-lived,” the ECB said in its regular economic bulletin.

“However, uncertainty about the global outlook has increased, while incoming data for the second quarter point to subdued global activity and trade.”

Surveys suggest Britain’s economy is shrinking at its fastest rate since the 2008-09 financial crisis and the Bank of England is widely expected to cut interest rates on Thursday.

With the euro zone economy having largely shrugged off the Brexit vote so far, the ECB reaffirmed on Thursday its expectation of a “moderate” recovery.

This view was shared by the head of Germany’s central bank, Jens Weidmann, one of the most hawkish ECB rate setters.

“My impression is that the economic outlook for the currency area has not fundamentally changed through the Brexit vote,” Weidmann told German weekly Die Zeit and Italian daily Corriere della Sera in interviews published on Thursday.

“There may well be a small damper, but in general the upward trend will continue,” he said, adding it was too early to give any reliable forecasts for what this might mean for future price developments.

Investors have been betting the ECB will soon extend its 80-billion euros a month money-printing program beyond its current end-date in March 2017 and change the terms of the scheme to avoid hitting constraints on sovereign debt purchases.

Echoing President Mario Draghi’s July policy statement, the ECB said it was awaiting more information, including new staff projections to be published in September, before making any decision on new policy moves.

“If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate,” the euro zone’s central bank said.

Weidmann opened the door to some changes but drew the line at touching a rule dictating that government bond buys must reflect each country’s contribution to the central bank’s capital, which makes Germany the biggest beneficiary.

“If we grant individual countries special conditions or concentrate increasingly on highly indebted countries than we will blur the lines between monetary policy and fiscal policy somewhat further,” Weidmann said.

Reuters
FRANKFURT | By Francesco Canepa
August 4, 2016