Bank of England says global outlook has ‘deteriorated materially’

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.

The UK central bank said volatility in the cost of energy and raw materials poses a significant risk of disruption that could amplify economic shocks in the future. Officials will conduct a probe of the “opacity” and “lack of data” in commodity markets and how those links feed vulnerabilities.

“The global outlook has deteriorated markedly,” BOE Governor Andrew Bailey said at briefing at the BOE. “Developments in Russia’s invasion of Ukraine are a key factor that will affect the global outlook.”

The warning came in the BOE’s report into financial stability published on Tuesday. Officials said they’d move ahead with annual stress tests on banks in September, evaluating the possibility of a “deep” recession and further increases in interest rates.

They also lifted the countercyclical capital buffer that banks must meet to 2%, the level it was at before the pandemic, starting in July 2023. The BOE had eased the regulatory capital demand to help firms keep pumping money into the economy.

“Given considerable uncertainty around the outlook, the FPC will continue to monitor the situation,” Bailey said. “We stand ready to vary the UK CCyB rate — in either direction — depending on how risks develop.”

Bailey said disruptions in commodity markets highlight vulnerabilities and links with rest of the economy.

“Addressing them will require engagement from a broad range of financial authorities,” Bailey said. “The Financial Stability Baoard is undertaking in-depth analysis and assessment of vulnerabilities in commodity markets.”

Bailey said that work will consider the “opacity and lack of data” in some markets and how “fragilities relate to physical markets, non-financial entities or entieis in other countries.”

Despite spikes in inflation and borrowing costs, the BOE said that most UK households and businesses remain well placed to cope with strain on their finances. The capital position of British banks remains “strong, and profitability has strengthened,” the BOE said in its report.

“Debt servicing remains affordable for most UK businesses,” the report said. “However, higher interest rates and input prices, weaker economic growth and continued supply chain disruptions are expected to weigh on corporate balance sheets.”

The BOE noted that inflationary pressures around the world have intensified after Russia’s invasion of Ukraine, and the real income of households is being squeezed by a surge in prices.

Still, wage growth and the government’s package of support measures will soften the blow and keep the number of vulnerable borrowers steady with levels at the start of the year. That’s even as some borrowers roll off cheap fixed-rate loan deals and will have to refinance at higher interest rates. –BLOOMBERG