By David Milliken and Suban Abdullah
LONDON (Reuters) – Global asset prices remain under pressure and are vulnerable to a significant decline as investors become more concerned about geopolitical risks, the Bank of England said on Wednesday.
The Bank of England said overall risks to British financial stability were unchanged from its last assessment in June, but it would be a mistake to draw comfort from a rapid recovery in asset prices after their decline in August.
“Valuations across many asset classes, particularly equities, quickly returned to extended levels following this episode. Markets remain vulnerable to a sharp correction,” the Bank of England’s Monetary Policy Committee said in a quarterly statement.
The Bank of England said weak US employment data and weaker-than-expected results from big technology companies led to a market sell-off in August, which was only reversed after stronger macroeconomic data was published – a boost investors should not count on happening again.
“Global vulnerabilities remain material, as do uncertainties about the geopolitical environment and global outlook,” the Bank of England said.
The central bank said that a twice-yearly survey conducted by the Bank of England of major financial companies operating in Britain showed that concerns about geopolitical risks had risen to their highest levels since the survey began in 2008.
This survey was based on responses from 55 companies from July 23 to August 12 and did not identify which sources of geopolitical risk were most concerning.
In addition to the conflict in the Middle East and Ukraine, the US presidential elections remain the subject of close attention.
The Bank of England noted that since June, hedge funds’ net short position in US government bonds has risen to $1 trillion from $875 billion. If funds are needed to unwind these positions due to changing risk perception, losses or other factors, this cold triggers “severe” pressures, the Bank of England said.
The central bank also said that rising levels of public debt in major economies could create risks to financial stability if investors take a gloomier view on government borrowing.
Britain’s public debt has risen to 100% of national income – mid-table by the standards of advanced economies – and Chancellor Rachel Reeves is due to present her first annual budget on October 30 in the wake of the Labor election on July 4. July.
Looking specifically at Britain, the Bank of England said most households and businesses are coping well with higher interest rates, although there are some difficulties facing small businesses and those backed by private equity investors.
In August, the Bank of England cut its key interest rate to 5% from a 16-year high of 5.25% before keeping it unchanged at 5% in September. Financial markets see a 90% chance of interest rates being cut again to 4.75% on November 7 after the next Bank of England meeting.
The Bank of England said lower interest rates meant mortgage costs for households whose fixed-rate mortgages expire next year would rise less than previously estimated. Overall, the interest burden on debt will be much lower than it was after the global financial crisis.
The increase in mortgage costs for the average family will be £150 per month, down from £180.
The central bank last month forecast the economy would grow by 0.3% on a quarterly basis in the second half of 2024, roughly the rate of long-term growth in Britain but lower than in the first half of the year when the economy recovered from the shallow recession that gripped the country. It happened in late 2023.
The Financial Policy Committee also said it would keep its countercyclical capital buffer – a tool it uses to manage risks in banks’ credit cycle – unchanged at 2%.