The Bank of England (BoE) has warned that risks to global financial markets remain elevated, despite easing tensions after the US delayed the implementation of tariffs announced in April. In its semi-annual assessment of financial stability, the BoE said key threats include geopolitical tensions, global trade frictions, and pressures on sovereign debt.
The BoE’s Monetary Policy Committee said the risk of a sharp fall in risky asset prices and a drastic change in investment strategies remained high. While global stock markets have recovered from their early April slump, bond markets remain cautious, particularly on expectations of rising borrowing levels in the US, UK and elsewhere. Domestic uncertainty is also contributing, including political pressure on the UK government’s plans to cut welfare spending.
The BoE also said that the UK bond market had performed well during recent episodes of stress, but warned that prolonged stress could have a greater impact. The UK's Office for Budget Responsibility also assessed the country's fiscal position as weak following the COVID-19 pandemic and criticised the government's failure to reduce public spending.
Despite the uncertain global environment, the BoE stressed that UK households and businesses remain resilient, and the domestic banking system is prepared to withstand economic stress. Accordingly, the BoE kept the (CCyB) rate at 2% to ensure banks are prepared to absorb losses during a downturn and continue to lend.
