KEY TAKEAWAYS.
• The Bank of England said Tuesday that the global economic outlook has “deteriorated materially” and warned of possible further shocks to come.
• Governor Andrew Bailey blamed Russia’s invasion of Ukraine for piling further pressure on commodity prices and already rising inflation.
• “It is the right time to lock in resilience so that we are well prepared for future possible shocks,” he said.
The Bank of England said the global economic outlook has “deteriorated materially” after surging commodity prices pushed up inflation around the world, posing a further downside risk in months ahead.
In a stark warning to the U.K. and the world, the Bank of England cautioned that inflation is here to stay, and urged U.K. banks to start saving up for rainy days ahead.
The institution now warns that prospects for the U.K. and global economy have “deteriorated materially,” according to the central bank’s latest Financial Stability Report, released on Tuesday.
“The global economic outlook has deteriorated materially,” Bailey said at a briefing at the Bank of England.
“It is the right time to lock in resilience so that we are well prepared for future possible shocks,” he added.
The warning came as the central bank published its Financial Stability Report Tuesday, in which it outlined a number of risks to the U.K.’s economic outlook.
Those include ongoing disruption to food and energy markets as a result of the war, high household and government debt, as well as the continued impacts of Covid-19 in China.
While the Bank said the UK’s banking sector was well-placed to cope with a severe downturn, it said banks must increase the amount of money they set aside to absorb shocks. Starting a year from now, banks will be required to set aside a sum equal to 2% of their assets as a buffer, as opposed to the normal 1%.
The Financial Policy Committee said it could vary the rate in either direction depending on how the global economy pans out.
The bank also said that more persistent inflationary pressures might lead to a further sharp tightening in global financial conditions.
“Tighter conditions would increase the pressures already facing households and businesses and the serviceability of public sector debt in some countries, including in the euro area,” it underlined.
It also said that tighter financial conditions and reduced real incomes will weigh on debt affordability for households, increasing the risks from global debt vulnerabilities.
The bank also warned about risks emerging from China, hinting at the re-emergence of vulnerabilities in the property sector and the risks related to China’s zero COVID-19 policies.
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