A vote for Brexit: the financial fallout

Today the world woke up to a UK vote to leave the European Union, the resignation of the Prime Minister and the tanking of the pound. After a tumultuous night, the result of the EU referendum was declared in the early hours: 51.9 per cent leave, 48.1 per cent remain. Although the pound rallied shortly after polls closed, once a Brexit became clear, it plummeted. At one stage, it hit $1.3305, a fall of more than 10 per cent and a low not seen since 1985. The move in sterling is the biggest one-day fall ever seen. Meanwhile, the London stock market has plunged more than 8 per cent in the wake of the UK’s vote to leave the EU. In the opening minutes of trade, the FTSE 100 index fell more than 500 points to 5,808.72. More than £100 billion has been wiped off FTSE 100 already and massive amounts of shares are changing hands in the City. Banks have been especially hard hit, with Barclays and RBS falling about 30 per cent. The price of Brent crude has also slumped and European stock markets are deeply in the red. ‘This is simply unprecedented, the pound has fallen off a cliff and the FTSE is now following suit,’ said Dennis de Jong, managing director of UFX.com. Howard Archer, chief UK and European economist for IHS Global, said: ‘The vote to leave the European Union is bad news for the UK economy, certainly in the near and medium-term. Even supporters of the Leave campaign have acknowledged that there will be a near-term hit to the economy from heightened uncertainty affecting business and consumer activity, as well as from financial market turmoil.’ What does all this mean for your personal finances? That will be debated in the coming weeks and months but the International Monetary Fund had warned earlier that Brexit could cause a sharp drop in house prices. The Treasury had said that house prices could be hit by between 10 per cent and 18 per cent over the next two years, compared to where they otherwise would have been.

Richard Donnell, Insight Director at Hometrack, said: ‘The decision to leave the EU will be most keenly felt in the London housing market which is fully valued and already facing headwinds. History shows that external shocks can reduce sales volumes by as much as 20 per cent with sales volumes already down over the last year. House price growth is already weak and running in low single digits in central London areas and modest price falls now appear likely in higher value markets as prices adjust in the face of lower sales activity.’

There are also fears that unemployment will rise and wages will fall. As for pensions, prior to the vote David Cameron said the so-called ‘triple lock’ for state pensions would be threatened by a UK exit. This is the agreement by which pensions increase by at least the level of earnings, inflation or 2.5 per cent every year – whichever is the highest.

The Bank of England has said it will take ‘all necessary steps’ to maintain stability. The Bank said it was ‘monitoring developments closely’ and had done ‘extensive contingency planning’ for the event of a Brexit vote. This could include interest rate cuts and an extension of its quantitative easing programme. Mark Carney, governor of the Bank of England, said it will not hesitate to take additional measures as markets adjust following the UK’s decision to leave the EU.

‘As a backstop, and to support the functioning of the markets, the Bank of England stands ready to provide more than £250 billion of additional funds for its normal market operations. The Bank of England is also able to provide substantial liquidity in foreign currency if required. We expect institutions to draw on this funding if appropriate.’

However, gold, the traditional safe haven in times of market turmoil, has soared in value overnight. Business leaders have called for the Government and the Bank of England to take ‘immediate and unambiguous’ action to shore up Britain’s economy after the country voted to leave the European Union. According to The Guardian, representatives of Britain’s biggest businesses have said that the Government needs to guarantee that EU citizens have the right to remain in the UK. Adam Marshall, acting director general of the British Chambers of Commerce, said: ‘The health of the economy must be the number one priority – not the Westminster political post mortem.’ Business leaders overwhelmingly called for Britain to remain in the EU, with more than 1,000 chief executives signing a letter backing a ‘remain‘ vote just days before the referendum. Mike Cherry, national chairman at the Federation of Small Businesses, said that small businesses needed to do stress tests to prepare themselves for market volatility. ‘Today we call on the government and the Bank of England to urgently put in place measures to prevent any further instability negatively impacting small businesses in the UK. Small firms need to know what this means for access to the single market as soon as possible.’ Energy investigation In other financial news, the Competition and Markets Authority (CMA) has published its final report on the retail energy market. City A.M. reports that energy firms may have to navigate more red tape in the future after the CMA proposed more than 30 new measures this morning. Confirming provisional findings announced earlier this year, the CMA said that energy suppliers should be ordered to hand details of customers who have been on a default tariff for more than three years to Ofgem. These details will then be used to build a database to allow rival suppliers to approach these customers, although it is intended that customers can opt out of this database at any time.