Bank of England Governor Andrew Bailey said global economic forecasts have deteriorated after commodity prices rose around global inflation.
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LONDON – The Governor of the Bank of England said on Tuesday that global economic forecasts had “materially deteriorated” and reported further blows that could come.
Andrew Bailey accused Russia’s invasion of Ukraine of accumulating more pressure on commodity prices and already raising inflation, and said more resilience is needed to mitigate future risks.
“The world’s economic outlook has deteriorated significantly,” Bailey said in a speech at the Bank of England.
“This is a good time to block resilience so that we are well prepared for future blows,” he added.
The warning came when the central bank released its Financial Stability Report on Tuesday, explaining a number of risks to the UK’s economic outlook. These include the continued disruption of the food and energy markets as a result of the war, the high debt of households and the government, as well as the continuing impact of Covid-19 in China.
The BOE, along with other central banks, has been raising interest rates in hopes of lowering high prices. However, Bailey acknowledged that this has made the economic landscape more difficult for households and businesses, and that there is little sign of a break in the short term.
“Higher prices, weaker growth and tighter financing conditions will make it more difficult for families and businesses to repay or refinance debt,” he said.
“Given that, we expect homes and businesses to expand further in the coming months. They will also be weaker in the face of more blows,” he said.
The BOE raises bank capital requirements
The comments came on Tuesday when the Bank raised its countercyclical capital buffer rate (CCyB) from 1% to 2%, starting in July 2023. Central banks increase the demand for regulatory capital when they think they are creating risks.
Bailey said the Bank’s Financial Policy Committee would be willing to continue to readjust the rate as needed.
“Given the high level of uncertainty surrounding the vision, the FPC will continue to monitor the situation,” he said. “We are ready to change the UK CCyB rate – in both directions – depending on the development of risks.”
Bailey also said the BOE will hold an annual stress test in September, assessing the UK banking system’s ability to manage a range of potential risks, including higher interest rates, falling asset prices and “deep” recessions.
However, he added that the sector as a whole looks strong and that lenders are now much better off than in the 2008 Global Financial Crisis to deal with a severe economic downturn.
“The economic outlook is questionable and certainly very challenging for many homes and businesses,” he said.
“The banking system is resilient, however, to this prediction, or even worse. In stark contrast to the financial crisis, it is in a position to alleviate the economic shocks, not add up.”
Global economic outlook “materially deteriorates”
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