On Tuesday, the Bank of England (BoE) issued a warning that the economic outlook was dark, not just for Britain, but globally. It also informed banks to focus on capital buffers in order to ensure they are prepared for weathering the economic storm to come.
Gloomy economic outlook
The Financial Stability Report of the Bank of England (BoE) was published on Tuesday and it issued a warning along with it. The British central bank said that the economic outlook had materially deteriorated for the UK and the world. It also added that the developments around the Russia-Ukraine war would also play a key role in this process.
According to international forecasters, such as the OECD and the IMF, the possibility of a recession is higher in Britain because its inflation has remained persistently higher than in other countries in the West, all of whom are dealing with the shocks in the commodity and global energy markets.
The Bank of England (BoE) said that banks in the UK were prepared to handle a severe economic downturn. However, it noted that their strong capital ratios would record a decline in the next few quarters.
The Financial Policy Committee (FPC) members confirmed that the counter-cyclical capital buffer (CCYB) rate would be doubled by the Bank of England (BoE) next year in July to 2%. It also said that the direction of the rate would depend on the outlook of the global economy. This particular rate is designed to work as a buffer for banks and its direction depends on the economic performance.
The BoE asserted that British banks were resilient to the vulnerabilities in debt seen in businesses and households. This was despite the inflation numbers in the UK reaching double digits and the cost of living crisis worsening. The central bank also expressed its concerns about the core financial markets and their health.
It was primarily talking about the British and US government bonds, which had proven to be vital in March 2020 when panic selling had occurred because of the global COVID-19 pandemic. The BoE said that liquidity conditions had gotten worse because of the high volatility, so much so that they had also affected markets that are usually very liquid. These include interest rate futures, gilts, and US Treasuries.
Trouble in markets
According to the British central bank, while core markets had remained functional in the UK, trading had become a lot more expensive. It said that as compared to the average bid-ask spreads in 2021 on short-dated gilts, they had almost doubled this year. The BoE said that if market volatility goes up any more, the conditions would get worse.
The central bank also stated that it would focus on the commodities market and conduct an in-depth analysis on their function. The Russian invasion of Ukraine has severely disrupted the metals trade. The war had delayed the stress test for banks for 2022 and the BoE said that it would conduct it in September and results could be expected next year.