UK Economy Remains Vulnerable to Financial Shocks (Central Bank)
The British economy remains susceptible to shocks in financial markets amid an uncertain geopolitical climate and elevated levels of global public debt, as stated in a quarterly report released on Wednesday by the Bank of England (BoE).
The BoE cautions that markets are prone to significant fluctuations that can impact the cost and availability of credit for households and businesses, as detailed in the report from its Financial Policy Committee (FPC).
These markets can react sharply to limited or unexpected information; for instance, this summer’s disappointing U.S. employment figures triggered temporary turmoil in financial markets.
While tensions in the Middle East could potentially drive up oil prices, the FPC has not yet observed any direct effects on the UK economy. Nonetheless, it emphasizes that the current period of heightened geopolitical risk may have broader repercussions.
Finance professionals surveyed by the BoE in a biannual study identify geopolitical tensions—encompassing issues beyond the Middle East and the conflict in Ukraine—as their foremost concern.
Furthermore, “demographic and climate changes,” along with high levels of public debt in major economies, present additional risks to the economy. The FPC warns that potential shocks may be exacerbated by non-bank finance, commonly referred to as “shadow finance,” which is less regulated than traditional banking institutions.
In September 2022, pension fund investments contributed to an increase in long-term borrowing costs for the UK following the budget introduced by the short-lived Prime Minister Liz Truss, noted for its massive and unfunded expenditures, necessitating intervention by the BoE.
