By Andy Bruce and Hugh Jones
LONDON, July 5 (Reuters) – The Bank of England warned on Tuesday that the economic outlook for Britain and the world was dim and told banks to increase capital buffers to ensure they can weather the storm.
“The economic outlook for the UK and globally has deteriorated materially,” the BoE said when it released its latest financial stability report, adding that developments around the war in Ukraine would be a key factor.
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International forecasters such as the IMF and OECD say Britain is more vulnerable to recession and persistently high inflation than other Western countries, all of which are struggling with global shocks in energy and commodity markets.
British banks were well placed to withstand even a severe economic downturn, the BoE said, although it noted that their capital ratios – while still strong – were expected to decline slightly in the coming quarters.
Members of the Financial Policy Committee (FPC) confirmed the BoE will double the interest rate countercyclical capital buffer (CCYB) to 2% next July and said it could move the rate in either direction depending on how the global economy develops .
The CCYB rate represents an additional buffer for banks that varies depending on the economic outlook.
Despite a worsening cost-of-living crisis, with inflation heading into double digits, the BoE said banks were resilient to debt vulnerabilities among households and businesses.
The central bank also expressed concern about the health of major financial markets – such as US and UK government bonds – which were subject to a “money squeeze” in March 2020 when the COVID-19 pandemic triggered panic selling.
“Amid high volatility, liquidity conditions have deteriorated even in normally highly liquid markets such as US Treasuries, bonds and interest rate futures,” the BoE said.
It noted that the UK’s main markets – although still operating – had become more expensive to trade, with bid-ask spreads in short-dated cats more than double the 2021 average.
“(Conditions) may continue to deteriorate, especially if market volatility increases further,” the BoE said.
The BoE also said it would carry out an in-depth review of the functioning of the commodities market, with metals trading severely disrupted in March by Russia’s incursion into Ukraine.
The central bank said it would start its 2022 stress test of banks – delayed by the war – in September, with results likely to come out in mid-2023.
(Writing by Andy Bruce Editing by Hugh Jones)
((andy.bruce@thomsonreuters.com; +442075423484; Reuters Messaging: ))
Keywords: BRITAIN BOE/BANKS
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