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BoE: Major shift in global trading arrangements could harm financial stability by depressing growth

"A major shift in global trading arrangements could harm financial stability by depressing growth," the Bank of England's Financial Policy Committee said in a statement following its two-day meeting.

Key takeaways

"Risks linked to debt sustainability concerns, including sharp yield rises, could crystalise quickly particularly if accompanied by rapid capital outflows."

"Probability of adverse events and potential severity of impact has risen after fall in risky asset prices."

"Will monitor leverage and concentration in core markets and trading strategies that could amplify stress."

"Global risks are particularly relevant to UK financial stability."

"Global developments pose additional risks especially for some highly leveraged corporate borrowers."

"Robust regulation standards support economic growth."

"A further reduction in global co-operation could reduce resilience."

"UK banks can support economy if conditions worsen substantially more than expected."

"Countercyclical capital buffer rate maintained at 2%."

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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