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Against the odds, the referendum on whether the United Kingdom should leave or stay in the European Union (EU) was narrowly won by the Leave camp.
The results sent shockwaves through political circles and financial markets. The British prime minister has stepped down (although he will stay in office until a successor is chosen). The pound fell 10.3% to its lowest level since 1985 and global stock markets dropped sharply as investors rushed to safe havens. The credit rating of the UK has been downgraded¬ by the three major rating agencies. Brexit is likely to have major implications on the UK economy and, to a lesser extent, the economies of the neighbouring Euro Area. Whether it triggers an outright global crisis remains to be seen. The Middle East and North Africa (MENA) region will probably be insulated, provided that the crisis remains localised and does not spill over to the rest of the world leading to a significant negative impact on oil prices.
On the policy side, the Bank of England faces a major dilemma. On the one hand, the worsening of the growth outlook should lead to lower interest rates in order to stimulate the economy. But lowering rates now would likely result in further depreciation of the pound, stoking future inflation.
The Euro Area is also likely to be affected by the Brexit shock, with most analysts expecting growth to fall by around 0.5% to 1.0% in 2016. This is mainly due to the uncertainty shock, which affects the Euro Area to a lesser extent than the UK. The region is also likely to be negatively impacted by the slowdown in the UK as it results in lower demand for exports.
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