Start of a decade of uncertainty or a brave new beginning?

As Mark Carney strode through the Parlours wing of the Bank of England to address the nation, he knew Britain was entering a new era.
Start of a decade of uncertainty or a brave new beginning?

As Mark Carney strode through the Parlours wing of the Bank of England to address the nation, he knew Britain was entering a new era.

Speaking directly to the camera, the Governor's words were calm and measured. But he was also determined to send a message that the Bank would deal with any financial fallout from Brexit.

This was the 51-year-old Canadian's "do whatever it takes" moment. Just as Mario Draghi, his counterpart at the European Central Bank had vowed in 2012, the Governor insisted that policymakers would "not hesitate" to flood markets with cash to prevent a repeat of the 2008 crisis.

British banks were stronger, more resilient and more prepared for shocks than in 2008, he insisted. Even if they weren't, the Bank's pounds 250bn war chest would be deployed to shore up markets. Foreign exchange reserves would also be used as a secondary buffer.

Watching over Carney as he spoke was Leslie O'Brien - whose portrait provided a fitting backdrop to the five-minute message.

The former governor was in office when Britain joined what was then known as the European Economic Community in 1973. The parallels don't stop there. O'Brien also presided over the devaluation of the pound in the late 1960s.

Destined or not, amid all the confusion one thing is clear: Britain has voted for Brexit.

Calls for a rerun of the vote caused the Government's petitions website to seize up on Friday. But there won't be another referendum. Talk of a "Bremain bounce" and going back to business as usual have disappeared.

But the world has not stopped turning, and the market crash that many predicted in the UK has been more muted than feared.

Britain's benchmark index fell just over 3pc on Friday. Some had predicted falls of up to 20pc.

Stock markets on the continent fared much worse, and the consequences of June 23 are likely to test the resilience of central banks, which have already ventured into uncharted territory to boost growth.

Project Fear is dead. Outgoing Prime Minister David Cameron offered only emotion as he addressed the press minutes before Carney's address. Britain's economy was "fundamentally strong", he said.

But change is coming. How that will impact UK growth, living standards, prices and jobs remains uncertain.

The Bank of England will now embark on the Herculean task of providing its best guess on how the next three years will pan out. Carney himself noted that it would take "some time" to establish "new relationships with Europe and the rest of the world".

As policymakers navigate through uncharted territory, the pound, which fell by 8pc on Friday, is likely to bear the brunt of any adjustment.

HSBC believes the most painful part is yet to come. It believes sterling will fall to $1.20 by the end of 2016, as "uncertainty lingers for the rest of the year". It forecasts the pound-euro to drop to euros 1.10 by the end of this year, from Thursday's high of euros 1.32.

This, economists say, could lead to a toxic combination of lower growth and higher inflation.

If HSBC's view of the world plays out, UK living standards are set for a massive squeeze if pay rises don't keep up. Inflation is forecast to climb to 1.5pc by the end of this year and 4pc by the end of 2017. The latter is double the Bank of England's 2pc target, and compares with previous forecasts of 0.8pc and 1.7pc respectively.

Some say Britain could plunge into a technical recession - defined as two consecutive quarters of falling economic output.

In any case, all agree that a substantial slowdown is on the cards.

UBS believes growth will be "around zero" for a "number of quarters", while HSBC cut its GDP forecast to 1.5pc, from 1.8pc for 2016.

HSBC forecasts growth of 0.7pc in 2017, from a previous projection of 2.1pc. This would represent the weakest growth since 2009, when the economy contracted by 4.2pc.

So what will be the Bank's response? Carney has already spelt-out the dilemma policymakers could face as it tries to keep the plates of the economy spinning.

This, as it has said several times, would present a "challenging trade-off" between boosting growth by cutting interest rates or keeping a lid on inflation by tightening monetary policy. Markets believe the response is a no-brainer. They have priced in a more than 50pc chance of a rate cut by August.

UBS believes the Bank will slash rates to zero by the beginning of next year, while Barclays thinks the bank will cut rates to zero by September and increase its stockpile of asset purchases to more than half a trillion pounds, from pounds 375bn today.

With interest rates already at a record low of 0.5pc, the idea that rates in the UK could go negative is also floating in the background.

Six central banks have already taken the plunge, and some speculate the Bank of England could be next.

Not if the Governor can help it. The Bank looked into cutting rates below zero at the height of the eurozone debt crisis but decided it could do more harm than good to the economy.

In a paper prepared for the Commons treasury committee in 2013, Sir Charlie Bean, then deputy governor, concluded that while there were "no significant technical or operational obstacles that would prevent the Bank from implementing a negative level of Bank Rate", its impact on the real economy could be limited.

History suggested banks were reluctant to pass on negative rates to customers, he said.

In Britain, where free banking is the norm and savings rates are already at a record low, this could create a problem. "Further reductions in savings rates, or a more widespread imposition of charges on retail current accounts, would likely meet with considerable customer resistance," Sir Charlie wrote in 2013.

Carney has also expressed scepticism about using the negative rates to boost growth. He told MPs that banks in Switzerland, where interest rates are -0.75pc, had tried to "square the circle" by passing on costs to customers through higher flat fees on mortgages instead of introducing a negative rate on deposits.

"It is now our judgment that we, if necessary, could lower Bank Rate," he said in February "It is not yet our judgment that it could go negative."

David Miles, who served on the Bank monetary policy committee until last Autumn, has a similar view.

"If Bank Rate were to be taken negative, I'd be very sceptical about whether that would get passed on easily into the interest rates that people pay on mortgages and overdrafts and that companies pay. I also think it has the potential to cause difficulties for banks' [profitability].

"There is a danger that if you were to take Bank Rate negative, it would have perverse effects."

Miles is much more open to more quantitative easing. "I think asset purchases are a different game," he says. "Because while one might be sceptical that they might have a limited impact, I don't see the same risk of it having a perverse one."

The issue of trade is one that policymakers will live and breathe over the next few years. Getting the right deal for Britain is key. During his resignation speech, Cameron said he would leave it up to his successor to trigger Article 50 of the EU Treaty, which will start the clock ticking on its two-year divorce settlement.

Early next week, the Prime Minister will head to Brussels to discuss the outcome of the vote with the other 27 EU members.

Sam Bowman, executive director of the Adam Smith Institute, says it is right that Cameron waits before starting the official process of withdrawal. "We've just seen one of the biggest political earthquakes in modern British history. The important thing now is to wait for things to calm down, take some time to take stock of where we are and where we want to be, and do everything we can to avoid major shocks to the economy as we leave."

Gerard Lyons, Boris Johnson's economic adviser, is likely to play a key role in the new administration that emerges. Lyons, who advised Johnson as London mayor, says he doesn't want to adopt an "off-the-shelf" model of trade like the Norway-style EEA agreement, or the relationship Switzerland or Canada has with the EU. "We need a deal for Britain" he insists.

Lyons is excited about Britain's prospects. "I do think it's a choice between being in a global Britain and an insular and inward-looking EU."

He also describes Cameron's earlier claim that a Brexit vote would herald a "decade of uncertainty" as "nonsense". He says: "The UK economy is going to do incredibly well. The world economy is in far better shape than many people give it credit for. We've got positive employment growth in the US in the EU, Japan, and in the UK. Emerging economies that have decelerated in recent years are likely to be at the bottom of their economic cycle, so different pieces of the economic jigsaw are moving into place. Talk of a decade-long adjustment is just wrong".

But hope and reality are two different things. As EU leaders hinted on Friday, Cameron might not have the luxury of waiting to figure out what's next. Brussels has already demanded that Britain activates Article 50 "as soon as possible" as they attempt to end the uncertainty over the bloc.

Dr Albert Sanchez-Graells, a senior lecturer in law at the University of Bristol, agrees. "For the EU, every concession to the UK is a very dangerous path," he says. "With Cameron leaving and the Tory leadership being in the air, the problem is that the EU is going to push hard to receive that notification as soon as possible."

There's also the thorny issue of immigration. "There's no doubt that the result yesterday exposed deep divisions within the country and we need to be mindful of that," says Lyons.

Those who champion the EEA model Norway enjoys point out that free movement of labour is a non-negotiable feature.

Others suggest a good way to cushion the impact of immigration on communities is to bring back the Migration Impacts Fund, which was quietly scrapped in 2010.

The original pounds 50m fund was paid for by migrants from outside the EU. Councils could apply for funding to pay for public services.

Professor Thom Brooks at Durham law school believes its reintroduction is essential. "Back in 2009 the fund was having a real impact. Migrants paid for teachers, for nurses, for more buses, for translation of documents. All the principles were right."

What's clear is that party loyalties will be tested. Lord McNally, who was an adviser to then foreign secretary Jim Callaghan in the 1975 referendum recalls: "One of the interesting things is that referenda loosen the cement in party loyalties. Inevitably you find friends where you didn't think you had them and enemies too, and it's never quite the same again.

"Whether it's fatal or not depends the individuals concerned. But it's never a glad confident morning again."

Additional reporting: Sam Dean

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