Brexit triggered volatility in markets, including a sharp depreciation of the British pound and dramatic falls in the share prices of British and European banks.
However, we believe the probability of a major global systemic risk event due to Brexit is low in the short term. We believe the European Central Bank and Bank of England stand ready to provide sufficient liquidity to ensure their banking systems continue to function.
Quantitative easing (QE) could also be redeployed in the United Kingdom (UK) or stepped up in the Eurozone to support sovereign bond markets if needed. The uncertainty and distraction created by Brexit are likely to result in reduced investment, increased savings and lower economic growth in the short term. In response, the Bank of England decided to reduce the cash rate to 0.25 per cent in early August.
It is important to distinguish between the nine nations that are members of only the EU and the 19 nations that are members of both the EU and the Eurozone. Leaving the Eurozone is more problematic than leaving the EU because there is no existing legal process to follow. There are four countries that are outside the EU but are part of the single market as members of the European Free Trade Association (Norway, Iceland, Switzerland and Lichtenstein). We believe it is 50 per cent likely that the UK will proceed to trigger Article 50 and negotiate an agreement to remain in the single market.