Central banks in the European Union are being urged to “focus more on central issues” in a bid to help the bloc avoid a banking crisis in 2018.
The European Central Bank has issued a series of documents in the wake of the Brexit vote, warning the UK that its future is “at stake”.
“The current economic situation and the uncertainties surrounding Brexit will likely influence the pace and scale of monetary and fiscal policy actions in the coming years,” the ECB said in its latest policy guidance.
“The central bank is therefore prepared to consider the potential impact of Brexit on the stability and sustainability of the euro area financial system.”
The EU’s decision to leave the bloc on June 23 has been a huge blow for the UK and has led to a fall in sterling and a fall of sterling-denominated borrowing costs.
The ECB’s policy guidance was issued on Tuesday to its policymakers in the hope of helping to “preserve the stability of the monetary union” and to make “the case for a strong monetary policy stance”.
The UK has been hit by a drop in sterling, which hit 1.4 per cent in early trading on Wednesday, the lowest level since mid-April, as the Bank of England prepares to announce its long-awaited policy statement on monetary policy.
A “low level of inflation and falling unemployment” have also helped boost the pound.
But the pound has also weakened on concerns that the EU would trigger a “Brexit cliff edge”, which would cause a rise in interest rates and force businesses to slash spending and reduce hiring.
In its latest report, the ECB is also urging that it “consider further its role in the governance of the eurozone” and that it is “responsible for the overall stability of monetary policy”.
The European Commission, which runs the eurozone, also is being urged “to focus more on key economic policy levers” to help keep inflation at the target rate of around 2 per cent.
“We are also encouraging the ECB to consider new tools, such as the creation of new tools for the exchange rate mechanism,” the Commission said in a statement.
The UK’s vote to leave is also causing concern for the financial system, with concerns that a “hard Brexit” would lead to a rise of interest rates on banks and a drop of sterling, according to data compiled by Bloomberg.
The Bank of Japan is also in a tricky position, with a drop against the dollar could force it to cut interest rates to the low end of the range for which it normally would.
A drop in the value of the yen could also force Japanese banks to cut their lending to the rest of the world.
“This could have serious implications for financial stability in the global financial system and on the global economy,” the Financial Stability Board said in the latest report.
The BOJ, meanwhile, has been trying to keep inflation as low as possible and has been buying government bonds in the hopes of keeping rates low.
“In the long run, a reduction in the exchange rates is a very unlikely event,” BOJ Governor Haruhiko Kuroda told a press conference on Tuesday.
“If rates stay low, that means there will be fewer funds available for investment.”
The BOA’s central bank has also been warning the EU about the risks posed by Brexit.
In March, it issued a statement calling for a “fiscal policy stance” and a “more prudent monetary policy approach”.
The central bank said that a weaker currency would make it harder for companies to invest, which would have an adverse effect on the economy.
“A weaker euro and weaker demand for financial services would also result in lower demand for UK and EU public investment,” the BOA said.
In an interview with Bloomberg, Mr Kuroda said the bank was also concerned about a possible rise in the risk of a “sharp fall” in the euro against the pound and other currencies.
The central banker said that he did not want the euro to fall to the “zero lower bound” of its level of about 0.6 per cent against the US dollar.