An important aspect, that has been widely ignored in the debate about the consequences of a Brexit, is the impact on ECB monetary policy. Lower oil prices and a weaker economy in the euro zone and in Germany are likely to increase deflationary pressures further. As a consequence, the ECB is likely to extend its expansionary monetary policy path further into the future. The Brexit will most likely imply a longer period of zero interest rates for the euro area.
Germany’s government bonds are serving as a safe haven during the financial market turmoil and long-term interest rates have therefore fallen further. Yields on almost all maturities of German government bonds are now negative, implying that the saver has to pay the German government for lending to it. That is good for the German finance minister, but bad for the German saver who has to expect an even longer period of low interest rates.
I expect the G7 finance ministers and central bank governors to issue a strong statement today in order to coordinate monetary policy and limited financial market volatility.