Bank of England’s financial stability report paints a bleak picture of the global economy amid soaring inflation, slowing growth and debt
- FPC warns UK and global economic outlook has ‘deteriorated materially’
- Outlook could worsen still depending on developments in Ukraine
- It has launched an ‘in-depth’ investigation into commodity markets
The Bank of England has warned of a worsening outlook for the global economy, as the war in Ukraine continues to exacerbate soaring inflation and weigh on growth.
The bank’s Financial Policy Committee’s latest financial stability report on Tuesday said the economic outlook for the UK and globally has ‘deteriorated materially’, and highlighted key risks arising in various markets.
It announced that it would conduct an ‘in-depth’ investigation of ‘opaque’ commodity markets, which have seen huge price spikes in the wake of the Ukraine war and left policy makers without a full picture of risks and vulnerabilities.
The Bank of England’s FSB will launch an investigation into commodity markets
Sky-high commodity prices, such as the spikes seen in oil, gas and precious metals, have been a key driver of broader inflationary pressures and have led a number of global regulators to emphasise the need to plug data gaps in the sector.
The BoE said: ‘Heightened uncertainty following the Russian invasion means there is a significant risk of further disruption in commodity markets.’
Further commodity market volatility could increase the credit needs of the sector, the BoE said, and while banks currently ‘have sufficient capital to continue to meet these needs’ there is uncertainty over the amount of credit that could be made available as this is down the judgement of lenders.
The BoE added: ‘The recent disruption has highlighted how vulnerabilities within commodity markets – and interconnections with the wider financial system – could propagate and amplify macroeconomic shocks’
‘Due to opacity and lack of data in some markets, quantifying the size and scale of these fragilities and interconnections remains challenging, and addressing this globally should be a priority.’
It said the Financial Stability Board would therefore be ‘undertaking in-depth analysis and assessment of vulnerabilities in commodity markets.’
More broadly, the Bank of England said the Ukraine is the ‘key factor’ affecting the economic outlook, ‘particularly if energy and food prices rise further’.
Stronger or more persistent inflation, according to the BoE, could lead to weaker economic growth globally, a further tightening of financial conditions, and the potential for further market volatility.
It explained that tighter market conditions ‘would increase the pressures already facing households and businesses and the serviceability of public sector debt in some countries’.
The bank said: ‘The economic outlook for the UK and globally has deteriorated materially. Following Russia’s illegal invasion of Ukraine, global inflationary pressures have intensified sharply.
‘This largely reflects steep rises in energy and other commodity prices that have exacerbated inflationary pressures arising from the pandemic, and further disruption of supply chains. Household real incomes and the profit margins of some businesses have fallen as a result.
‘Global financial conditions have also tightened significantly, in part as central banks across the world have tightened monetary policy. Market interest rates and corporate bond spreads have risen sharply, reflecting expectations of further policy tightening in response to renewed risks of more persistent elevated inflation and increasing credit risk.
‘The outlook is subject to considerable uncertainty and there are a number of downside risks that could adversely affect UK financial stability.’