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Prospects of the world economy “significantly worsened”

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Andrew Bailey, the head of the Bank of England, said that the outlook for the global economy has worsened significantly after rising commodity prices led to higher inflation around the world.

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LONDON — The head of the Bank of England said Tuesday that the outlook for the global economy has “deteriorated significantly” and warned of possible further shocks.

Andrew Bailey blamed Russia’s invasion of Ukraine for further pressure on commodity prices and already rising inflation, and said additional resilience was needed to mitigate future risks.

“The global economic outlook has deteriorated significantly,” Bailey said at a briefing at the Bank of England.

“This is the right time to lock in resilience so that we are well prepared for future potential shocks,” he added.

The warning came after the central bank published it Financial Stability Report Tuesday, in which he outlined a number of risks to Britain’s economic outlook. These include ongoing disruptions in food and energy markets as a result of the war, high household and government debt, and the lingering impact of Covid-19 in China.

We expect households and businesses to become more stressed in the coming months.

Andrew Bailey

Governor of the Bank of England

The Bank of England, along with other central banks, is raising interest rates in an attempt to reduce high prices. However, Bailey acknowledged that this has complicated the economic landscape for households and businesses, and that there is little sign of easing in the near term.

“These higher prices, weaker growth and tighter financing conditions will make it more difficult for households and businesses to repay or refinance debt,” he said.

“Given this, we expect households and businesses to become more stressed in the coming months. They will also be more vulnerable to further shocks,” he said.

BOE raises bank capital requirements

The comments came after the Bank on Tuesday raised the countercyclical capital buffer (CCyB) rate for banks from 1% to 2% starting in July 2023. Central banks increase demand for regulatory capital when they believe risks are rising.

Bailey said the bank’s Financial Policy Committee would be prepared to continue adjusting the rate as needed.

“Given the significant uncertainty surrounding the outlook, the FPC will continue to monitor the situation,” he said. “We are prepared to change the CCyB rate in the UK – either way – as risks develop.”

Unlike the financial crisis, it is capable of softening economic shocks, not intensifying them.

Andrew Bailey

Governor of the Bank of England

Bailey also said the BOE would continue its annual stress test in September, assessing the UK banking system’s ability to cope with a range of potential risks, including higher interest rates, falling asset prices and “deep” recessions.

However, he added that the sector looks generally strong and that lenders are now much better placed than they were during the 2008 global financial crisis to deal with a severe economic downturn.

“The economic outlook is uncertain and undoubtedly very challenging for many households and businesses,” he said.

“However, the banking system is resilient to such a prospect or even much worse. Unlike the financial crisis, it is capable of softening economic shocks, rather than intensifying them.”

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