Brexit fallout: ECB warns of significant impact on Eurozone

Britain's decision to vote in favour of leaving the European Union could have a significant impact on the Eurozone, the minutes from the European Central Bank's meeting held on 2 June has showed.

The notes show ECB policymakers were growing increasingly worried about a slowdown in the Eurozone, where growth was hampered by a number of factors even before the bout of volatility triggered by Britain's EU referendum.

"In the event that the United Kingdom voted to leave, i.e. a 'Brexit', there could be significant, although difficult to anticipate, negative spillovers to the euro area via a number of channels, including trade and the financial markets," the ECB said.

Three weeks after the meeting was held, Britain voted 52% to 48% in favour of leaving the 28-country bloc, plunging the nation into political and financial turmoil and sending the pound to spiral to a 31-year low against the dollar twice in two days earlier this week.

The referendum fallout has also seen investors flee to top-rated government debts. That, in turn, reduces the bonds available for purchase to the ECB as part of its €1.74tn quantitative easing programme.

At the meeting in June, Europe's central bank warned that markets could struggle to find sufficient volumes of debt to purchase, which could subsequently fuel further price volatility. Data released on Thursday (7 July) confirmed those fears, as it showed over 30% of government bonds issued in the Eurozone are no longer eligible for the ECB's asset buying scheme because they yield less than the bank's -0.4% deposit rate.

However, some analysts believe that the Eurozone's exit from deflation last month and the recovery in the region's equity markets after the immediate post-Brexit vote plunge has eased pressure on the ECB to take any immediate policy action.

Frankfurt policymakers responded to the Brexit vote by pledging to implement whatever measure it took to ensure stability in financial markets, adding the ECB was ready to provide additional liquidity - both in euros and foreign currencies - if needed.

"We expect the ECB to stay in 'wait-and-see mode' and continue to focus on implementing its March package of measures," said Howard Archer, chief UK and European economist at IHS Global Insight."

He added that if the ECB does "eventually feel further stimulative measures was necessary to counter increased downside risks to the Eurozone growth and inflation outlooks coming from the Brexit vote, it would most likely be through extending [...] the length of its Quantitative Easing programme and possibly also the monthly amount of purchases".