Bank of England warns of market challenges

The Bank of England’s Financial Policy Committee (FPC) has published a report on the health of the UK economy and financial system.

The FPC said that the probability of adverse events had risen, and the UK’s open economy was particularly exposed to the market turmoil. The report also noted that UK banks remained well-capitalised and had high levels of liquidity.

Bank of England rate-setter Sarah Breeden has stressed the need for caution regarding interest rate cuts amid ongoing global uncertainties. Breeden noted that the Bank must assess supply chain disruptions and domestic uncertainties resulting from global instability before making decisions.

Richard Pinch, Senior Director Risk, at Broadstone, said, “While the Bank of England’s Financial Stability Report highlights the significantly enhanced risks to global economies, it remains confident in the resilience of UK households, business and banking system even if financial conditions were to worsen.

“Despite plunging equity markets, this update should provide reassurance, which was echoed by the Chancellor yesterday, that the UK’s financial system remains resilient.

“High levels of capitalisation and liquidity support this confidence,e which suggests that the majority of businesses and households should remain stable and resilient even in the face of this notable period of market turbulence. For example, the report highlighted that mortgage and consumer credit arrears remained low.

“The Bank of England did suggest that some highly leveraged corporate borrowers could come under pressure from widening credit spreads if volatility remains or intensifies. It demonstrates the importance of constant model monitoring and comprehensive risk management to minimise potential harms.”

The FPC released a separate report on the use of artificial intelligence (AI) in financial markets. The report says that while AI could be used to increase market efficiency, there were also risks, as traders could inadvertently take actions collectively in such a way that reduces stability. The report also warned that there was the potential for AI models to learn that volatility in financial markets increased their opportunity to make a profit.