The Bank of England (BoE) issued a warning on Friday, highlighting that rising trade barriers could harm global economic growth, increase inflation uncertainty, and lead to financial market volatility.
Such disruptions might raise borrowing costs for businesses and consumers.
Without directly mentioning Donald Trump’s recent U.S. presidential election victory, the BoE noted potential risks to the financial system, including disruptions to cross-border capital flows and reduced risk diversification.
“A reduction in the degree of international policy cooperation could hinder progress by authorities in improving the resilience of the financial system and its ability to absorb future shocks,” the BoE stated in its semi-annual report.
Governor Andrew Bailey, responding to questions about a possible second Trump presidency, maintained that it was important to wait and see the administration’s policy direction.
“We are seeing increased risk of global fragmentation. But I would say this, that there are quite a lot of causes of that and I don’t think it’s right to pin it on one particular event,” Bailey remarked.
The BoE acknowledged that UK households, businesses, and banks remain stable, but noted the financial sector faces risks exacerbated by the country’s open economy and high global public debt levels.
Bailey dismissed criticism from finance minister Rachel Reeves, who suggested regulatory policies were overly restrictive.
“Put simply, there is not a trade-off between financial stability and growth. This is a fundamental point,” he emphasized.
To ease regulatory burdens, the BoE announced it would conduct full stress tests on banks every two years, starting in 2025, with less detailed evaluations in between.
While UK banks remain well-capitalized and liquid, the BoE highlighted vulnerabilities in non-bank financial institutions, warning they might face asset fire sales in a financial shock.
The countercyclical capital buffer for banks will remain at 2%, its neutral setting, to support resilience during economic stress.