By David Milliken and Suban Abdulla
LONDON, Oct 2 (Reuters) – Global asset prices remain under pressure and vulnerable to a big drop as investors become increasingly concerned about geopolitical risks, the Bank of England said on Wednesday.
The BoE said overall risks to UK financial stability were unchanged from its last assessment in June, but it would be wrong to take comfort in a quick recovery in asset prices after a decline in August.
“Valuations of several asset classes, especially equities, quickly returned to high levels following the episode. Markets remain vulnerable to a sharp correction,” the BoE’s Financial Policy Committee said in a quarterly statement.
Weak U.S. employment data and weaker-than-expected results from big tech companies led to a market sell-off in August that only reversed after stronger macroeconomic data was released – a boost that investors should not expect to recur, according to the BoE.
“Global vulnerabilities remain material, as do uncertainties surrounding the geopolitical environment and global outlook,” the BoE said.
A biennial survey by the BoE of major financial firms operating in Britain found that concerns about geopolitical risk had risen to their highest level since the survey began in 2008, the central bank said.
That survey was based on responses from 55 companies between July 23 and August 12 and did not specify which sources of geopolitical risk were most concerning.
In addition to the conflict in the Middle East and Ukraine, the American presidential elections remain closely monitored.
The BoE noted that hedge funds’ net short position in US government bonds had risen from $875 billion to $1 trillion since June. If funds had to unwind these positions due to changed risk perception, losses or other factors, this cold snap would lead to “severe” tensions, the BoE said.
The central bank also said high government debt levels in major economies could lead to risks to financial stability if investors take a more dim view of government bonds.
Britain’s national debt has risen to 100% of national income – mid-tier by advanced economy standards – and Chancellor of the Exchequer Rachel Reeves will present her first annual budget on October 30, following the July 4 Labor Party elections .
Looking specifically at Britain, the BoE said most households and businesses were coping well with high interest rates, although there were some problems for small businesses and those backed by private equity investors.
In August, the BoE cut its key interest rate from 5.25% to 5%, before leaving it unchanged at 5% in September. Financial markets see a 90% chance of a further cut to 4.75% on November 7 after the next BoE meeting.
Lower interest rates meant that mortgage costs for households whose fixed-rate mortgages matured next year would rise less than previously expected, the BoE said. Overall, the interest burden on debt would be much lower than after the global financial crisis.
The increase in mortgage costs for an average household would be £150 per month, down from £180.
The central bank forecast last month that the economy would grow by 0.3% per quarter in the second half of 2024, around Britain’s long-term trend growth rate, but less than in the first half of the year as the economy recovered from a superficial recession that took place at the end of 2023.
The FPC also said it is keeping the countercyclical capital buffer – a tool it uses to manage risks in banks’ credit cycles – unchanged at 2%.
