Bank of England warns on market impact of Trump tariffs
The Bank of England has warned the UK could be particularly affected by further shocks to markets as a result of being “an open economy with a large financial sector”.
The Bank’s Financial Policy Committee (FPC) warned that while bond markets had deteriorated, they could be in a worse position if President Trump followed through with tariffs.
The report also noted that the collapse in the link between a strengthening in the US dollar and Treasury yields meant market players had to remain more vigilant in managing risk as “significant changes in foreign investor currency hedging may also create extra pressure on funding markets”.
However, the Bank predicted that most UK firms – accounting for three fifths of nationwide employment – will be able to manage their debt if President Trump hikes tariffs and further rattles global growth.
Other threats, from oil market price changes and cyber attacks, were also highlighted as a stress on financial stability, with the FPC urging City leaders and regulators to monitor developments.
“Stresses in overseas banks could affect the UK financial system through macroeconomic spillovers and contagion to funding conditions for UK banks,” policymakers said.
“In the recent market turbulence this potential source of stress did not materialise but more prolonged or extreme bouts of volatility – especially if combined with a shift in historical correlations – could prove more challenging for banks globally to manage.”
But separate modelling from Bank officials said the UK remained largely protected from economic shocks, signalling Britons’ resilience amid a string of global conflicts and economic hits from the pandemic.
The Bank said it would take a “very severe shock to incomes and mortgage spreads” for debt service ratios, the total debt payments divided by total income, to reach a new peak.
The analysis considered high savings levels in the first quarter of the year and a generally low share of households with high debt-servicing burdens since the 2008 financial crisis.
Bank of England praise UK’s resilience
Policymakers also pointed out that the full impact of higher interest rates had not passed on to some 30 per cent of mortgage holders, with the Bank now downgrading the portion of mortgage accounts expected to refinance onto higher rates down to 41 per cent from 50 per cent.
“It would take significant falls in household incomes and rises in interest rates for the aggregate debt servicing burden to rise materially.”
The FPC also found confidence in UK firms’ chances of surviving tariffs as its findings suggested firms which employ 60 per cent of the UK’s total workforce and 30 per cent of the stock of corporate debt would still be able to pay off lenders “even in the face of further global shocks such as lower global demand and supply”.
The latest report pointed to the risks faced by small and medium-sized businesses, with some sectors such as manufacturing likely to suffer from trade turmoil.
Karim Haji, global and UK head of financial services at KPMG, said the report may be seen as generally positive for households and firms.
“While geopolitical tensions and volatility in global markets remain key risks, the sector enters the second half of the year well-capitalised, liquid and profitable.
“There are encouraging signs that UK households are benefitting from continuing financial stability, with improved mortgage approvals and lower levels of unsecured borrowing.”