Bank of England issues warning of sustained economic challenges

The British economy remains open to financial market shocks amid geopolitical tensions and high levels of public debt in major economies, the Bank of England warned on Wednesday.

The BoE's Financial Policy Committee (FPC) said that "significant financial market and global vulnerabilities remain" since its report in June.

The Bank pointed to a short-lived market rout in August to illustrate the potential for the market to react strongly to unexpected or even seemingly-small pieces of news.

During the summer, a confluence of factors from weaker-than-expected US jobs data to disappointing results from US AI companies, as well as diverging interest rate decisions between the United States and Japan, all came together to cause the market to spike, the bank said.

The BoE warned of the potential for further markets unrest driven by the "current period of elevated geopolitical risk and uncertainty".

The bank's committee did not make specific mention of the effects on the UK economy of recent escalation in tensions in the Middle East, which is pushing up oil prices.

Financial players questioned in the BoE's survey put geopolitical risk at the top of their list of fears about threats to the UK's financial sector.

Adding to geopolitical risks, UK financial stability could be negatively impacted by "high public debt levels in major economies" along with "structural trends such as demographics and climate change", it said.

The bank warned that knocks to the market could lead to "a tightening in credit conditions for households and businesses".

The BoE in August cut its key interest rate for the first time since the Covid pandemic erupted in early 2020, after inflation cooled markedly.

It had ramped up borrowing costs between late 2021 and last year to combat soaring price rises caused by the Covid pandemic and Russia's invasion of Ukraine.

Retail banks tend to mirror BoE policy over rates and therefore soaring hikes weighed heavily on millions of borrowers, notably people with home loans.

"Mortgagors continued to be resilient to higher interest rates, although some lower income households and renters remained under pressure," the BoE noted on Wednesday.

The bank held its interest-rate at five percent in September, as BoE governor Andrew Bailey said the central bank needed "to be careful not to cut too fast or by too much", as UK inflation remains above its target.

The decision came a day after the US Federal Reserve opted for a jumbo 50 basis point interest-rate cut.

Market participants expected the BoE to next cut rates in November.