Bank of England (BOE) Governor Andrew Bailey speaks during a press conference on the monetary policy report at the bank’s headquarters in the City of London, England, Thursday, August 1, 2024.
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The Bank of England warned on Friday that higher trade barriers could hit global economic growth and exacerbate inflationary uncertainty, which could lead to financial market volatility and push up borrowing costs for businesses and consumers.
The Bank of England did not specifically mention Trump’s victory in the U.S. presidential election, but said the financial system could also be affected by disruptions to cross-border capital flows and a reduced ability to diversify risks.
“Reduced levels of international policy cooperation could hinder progress by authorities in improving the resilience of the financial system and its ability to absorb future shocks,” the Bank of England said in a biannual report on the financial system.
Asked at a news conference about the possible impact of Trump’s re-election, Bailey reiterated his stance on the policies he would like to see the Trump administration pursue.
“We’re seeing an increasing risk of global fragmentation. But I would say there are many reasons for this and I don’t think it’s right to blame it on one particular event.”
The Bank of England reported that while UK households, businesses and banks appear to be in good shape, the UK financial sector faces “particularly relevant” risks given the openness of the UK economy.
Other threats include high levels of public debt in many economies around the world.
“Uncertainty and risks to the outlook have increased,” the report said.
Bailey dismissed complaints from new finance minister Rachel Reeves that UK regulators were inadvertently harming the economy by taking too tough a stance on risk-taking in the financial sector.
“Simply put, there is no trade-off between financial stability and growth. That’s a fundamental point,” he said.
But he said there were options for how the rules would be applied, saying the Bank of England’s announcement on Friday that it would conduct a comprehensive test of the health of UK banks every two years instead of annually was one example of how it could help make Britain’s banking sector more competitive. example.
Bailey also stressed the importance of minimum international financial standards after the November 5 US election.
The Bank of England said it continued to judge financial market valuations and risk premia to be “vulnerable to substantial corrections” due to growth and inflation risks and interest rate uncertainty.
The report warned that “long-standing vulnerabilities in market-based finance are likely to exacerbate this adjustment” and could push up borrowing costs for UK households and businesses.
The Bank of England said the latest test of the resilience of UK banks showed they were well capitalized and had high liquidity levels.
But it said non-bank financial institutions such as hedge funds remained vulnerable to sudden financial shocks, in which case assets such as UK corporate bonds might have to be sold.
Going forward, the Bank plans to conduct comprehensive stress tests every two years from 2025 to relieve administrative pressure on lenders and allow the BoE to focus on other potential financial risks.
During this period, the BoE will conduct less detailed desk stress tests as needed.
The Bank of England kept its countercyclical capital buffer (CCyB), or “rainy day” capital requirements for banks, at a neutral set level of 2% to draw on during difficult times.
