The Bank of England (BOE) has warned over the increase in trade barriers, noting that it could threaten the global economy. In its latest report, the bank highlighted how increased restrictions on international trade are affecting economic growth and causing uncertainty around inflation figures. The bank said the barriers are increased risks that have driven borrowing costs for businesses and individuals.
The bank mentioned that the fallout is deeper, discussing the drop in financial cooperation worldwide. It said the drop could seriously affect the system. It means that if global regulators refuse to call a truce, any crises in the future will hit them harder than they should. And while the report did not address anyone in particular, its timing is convenient, coming at a time when United States President Donald Trump made his first trade threats.
Bank of England worries as the UK fights to maintain its spot
Bank of England governor Andrew Bailey, during questions, refused to talk about the effect of Trump’s win on the country. Instead, he was diplomatic in his reply. “We are seeing an increased risk of global fragmentation. But I would say this: there are many causes, and I don’t think it’s right to pin it on one particular event,” he said.
Despite this, there are risks that the United Kingdom needs to worry about. The country’s financial system is quite open, making it a target for shocks from other parts of the world. The BOE noted that individuals and financial institutions are doing great, but highlighted the need to be wary due to vulnerabilities. The report revealed worrying public debts worldwide, adding to the unpredictable nature of the financial market.
Meanwhile, Finance Minister Rachel Reeves has pointed out the heavy-handedness of the bank towards regulation, noting that it is hindering growth. However, Bailey rejected the criticism, noting that there is no in-between for financial stability and growth. He clarified that regulators are flexible with the way they apply rules. Bailey highlighted that to make things competitive, they will start conducting stress tests on banks every two years.
The report details the effect of volatility on institutions
The report highlighted the fragility of the financial market, noting the vulnerabilities surrounding it. It said that trade barriers, inflation, and growth risks could be the perfect ingredients to cause chaos. If things go bad, borrowing costs could increase, creating a bad atmosphere for businesses and households in the UK.
It also talked about hedge funds and other non-banking firms, calling them a wild card. The report revealed that although most look big on paper, the BOE is far from convinced. It said shocks could push the hedge funds to sell assets like the British corporation bonds. If it happens, the report revealed, it would spread fear and cause borrowing costs to rise exponentially.
The report said the BOE has these institutions in its sights but fears about the ones not under its control. However, every metric is pointing to these banks doing well. Most have enough liquidity and have passed the BOE’s numerous tests. While the BOE focuses on its stress test every two years, it will conduct slightly easier to pass desk tests in the free years.