Bank of England warns about risks due to rising trade barriers

On November 29, 2024, the Bank of England released a half-yearly report highlighting growing concerns regarding Britain's financial sector amid rising global trade barriers. The report suggested that while U.K. households, businesses, and banks seemed stable, the financial sector was particularly vulnerable to external risks stemming from the global economy's openness. High levels of public debt across various economies further compounded these vulnerabilities, leading to an increase in uncertainty over economic outlooks. The report emphasized that heightened trade barriers could not only impinge on global growth but also escalate inflation uncertainties, thereby inducing volatility in financial markets. This situation may lead to rising borrowing costs for both businesses and consumers, highlighting the interconnectedness of international trade and domestic financial health. Furthermore, the Bank of England cautioned that disruptions to cross-border capital flows could diminish the financial system's capacity to diversify risks effectively. This lack of diversification could have detrimental effects, especially if international cooperation on policy-making declines. The report did not directly address the implications of Donald Trump's recent electoral victory, but it recognized the potential for significant changes in U.S. economic policies that could impact global financial systems. Additionally, the report indicated that existing valuations in financial markets are susceptible to sharp corrections, especially amid uncertainty regarding interest rates. Such potential corrections might be exacerbated by inherent weaknesses in market-based finance. In response to these issues, the Bank of England is set to revise its approach to stress testing U.K. banks. It will conduct full tests every two years, starting in 2025, as a measure to reduce the administrative burden on lenders and enhance competitiveness while focusing resources on emerging financial risks. Despite some criticisms regarding the impact of regulatory stances on economic growth, the central bank’s leadership emphasized that prioritizing financial stability does not contradict economic growth. The ongoing adjustments in policy reflect a considered effort to maintain the balance between the health of financial institutions and supporting economic dynamism during uncertain global conditions.