Bank of England Governor Andrew Bailey has said that the global economic outlook has deteriorated materially after rising commodity prices around the world.
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LONDON – The governor of the Bank of England said on Tuesday that the global economic outlook has deteriorated “materially” and warned of a possible setback.
Andrew Bailey blamed Russia’s invasion of Ukraine for putting further pressure on commodity prices and already rising inflation, and said more flexibility is needed to mitigate future risks.
“The global economic outlook has deteriorated materially,” Bailey said at a briefing at the Bank of England.
“This is the right time to lock in resilience so that we are well prepared for potential future shocks,” he said.
This warning came as soon as the central bank published financial stability report Tuesday, in which it outlined a number of risks to the UK economic outlook. They include ongoing disruptions in food and energy markets as a result of the war, high domestic and government debt, as well as the continuing effects of COVID-19 in China.
We expect further expansion to homes and businesses in the coming months.
Andrew Bailey
Governor, Bank of England
The BoE, along with other central banks, is raising interest rates to bring down high prices. Bailey, however, acknowledged that this had made the economic landscape difficult for households and businesses, and showed no signs of slowing down in the near term.
“These high prices, weak growth and tight financing conditions will make it difficult for families and businesses to repay or refinance debt,” he said.
“Given this, we expect homes and businesses to be more stretched in the coming months. They will be more vulnerable to further shocks,” he said.
BOE raises demand for banking capital
The remarks came as the bank on Tuesday raised its countercyclical capital buffer rate (CCyB) for banks from 1% to 2% starting July 2023. Central banks increase the demand for regulatory capital when they believe the risks are increasing.
Bailey said the bank’s Financial Policy Committee would be prepared to continue with rate readjustments as needed.
“Given the considerable uncertainty surrounding the outlook, the FPC will continue to monitor the situation,” he said. “We are prepared to change the UK CCYB rate in either direction – depending on how risk evolves.”
In stark contrast to the financial crisis, it is in a position to mitigate the economic shocks, not compound them.
Andrew Bailey
Governor, Bank of England
Bailey also said the BoE will go ahead with its annual stress test in September, evaluating the ability of the UK banking system to handle a variety of potential risks, including high interest rates, falling asset prices and a “deep” recession.
However, he added that the sector looks generally strong and lenders are now in a better position to deal with the severe economic downturn than they were in the 2008 global financial crisis.
“The economic outlook is uncertain and undoubtedly a very challenging one for many households and businesses,” he said.
“The banking system is resilient to that approach, though, or a worse one. Just in contrast to the financial crisis, it is in a position to mitigate economic shocks, not add to them.”