As the time nears when the United Kingdom is expected to invoke Article 50 and begin the steps towards exiting from the European Union, the Bank of Jamaica (BOJ) has submitted its analysis of the coming process, stating that it expects an increasingly negative impact on financial markets but also that the UK central bank is expected to take action to inject calm.

On 23 June 2016, Britain voted in a referendum to leave the European Union (EU) – a process popularly known as Brexit.

As the BOJ narrates in its quarterly monetary policy report (QMPR) released on August 29, it was the result of an accumulation of negative sentiment towards Europe’s regional integration movement.

The UK has to invoke Article 50 of the Lisbon Treaty to officially leave the EU. The BOJ warned that a delay in taking the expected action might further destabilise markets.

For the UK itself, the BOJ notes, based on that country’s trade data as at 2015, the EU is the country’s largest trading partner accounting for 66.7 per cent of total trade, with exports to and imports from the region estimated at 54.8 per cent and 63.2 per cent, respectively.

“It is expected that, with the Brexit, these shares are likely to fall in a context where the UK is expected to lose the favourable trade relationships from which EU members benefit,” the BOJ states – adding that consequently Brexit could have “immense negative implications for global financial stability”.

The EU is estimated to account for approximately one-third of the financial and insurance services exported from the UK. Four large banks — JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch have committed to helping Britain to retain its position as the leading international financial centre. Most of the UK banks’ investments are in countries within the Union.

The BOJ notes the IMF estimate that UK output could fall by 1.5 per cent in the long run. However, it notes: “Under an adverse scenario, in which negotiations with the EU do not proceed smoothly and the UK eventually defaults to WTO rules, the uncertainty is assumed at the same level as that experienced during the global financial crisis, but is somewhat slower to peak and takes longer to dissipate. In this case, output would be lower by about 4.5 per cent in the long run.”

The BOJ indicates in its report that some of the risks to financial stability in the UK have already begun to crystallise, and as such, the Bank of England has taken actions including the release of £150 billion of lending to households and businesses by relaxing regulatory requirements on the banking sector.

The UK Financial Policy Committee has also reduced the UK’s countercyclical capital buffer rate from 0.5 per cent to zero per cent of banks’ UK exposures with immediate effect, and the Bank of England also introduced a package of measures designed to provide additional support to growth and to achieve a sustainable return of inflation to the target. This includes a 25 basis point cut in bank rate to 0.25 per cent and a new Term Funding Scheme to reinforce the pass-through of the cut in bank rate.

The central bank has also purchased up to £10 billion of UK corporate bonds; and expanded its asset purchase scheme for UK government bonds to £60 billion.

There has also been a promise to cut the corporate tax rate to 15 per cent from 20 per cent.

In 2015, the UK accounted for 14.9 per cent of remittance inflows and 9.3 per cent of visitor arrivals to Jamaica. Goods exported to the UK accounted for 5.2 per cent of total exports. In general, foreign direct investments from the UK have been negligible.

In its analysis of the implications of Brexit for the Jamaican Economy, the Bank of Jamaica said GDP growth could be lower, given the expected weakening in global growth; and visitor arrivals may be lower than previously projected.

Additionally, it projected that oil prices could be lower than anticipated in the context of a possible downward revision to global growth and the expected stronger appreciation of the US dollar.

The BOJ also points to a probable fall-off in remittance flows given the likely weakening of the UK labour market.

In terms of positive outcomes, the BOJ said imports from the UK could increase given the depreciation of the pound sterling. Duty-free access to the EU is expected to remain given that the EPA trade agreement was signed between Caricom and the EU.

However, the BOJ noted, the impact on future trade deals is uncertain since the UK was a key partner in trade negotiations with the EU.

In the short term, the Jamaican central bank said protracted uncertainty in financial markets could result in heightened risk aversion in bond markets as well as a possibility that the Federal Reserve could delay a rate increase in the near term.

“The delay in a US rate rise would, however, bode well for interest rates in emerging markets such as Jamaica. In addition, it is expected that central banks will take a coordinated approach to calm financial markets in the event of a significant deterioration in market sentiments,” it was stated in the QMPR.