The Bank of England warned that the uncertainty caused by the global wave of election, which will begin this coming weekend, could destabilise the UK financial system.
Officials are worried about the policies that newly-elected governments in large economies may implement, including in the US where Donald Trump is running for a second term as president ahead of the November election.
The French President Emmanuel Macron’s shocking announcement of a parliamentary elections, with a preliminary round on 30 June, and Marine Le Pen’s extreme right National Rally expected to make substantial gains had demonstrated how political uncertainty can impact economic growth predictions and cause volatility on financial markets, affecting the prices of government debt, said the Bank’s Financial Policy Committee (FPC).
With more than 80 countries – or more than half of the world’s populace – heading to the polls in this year, the sheer volume of elections is a cause for concern. This includes the UK where voters will cast their ballots in a general elections on 4th July.
The Bank’s Financial Stability Report stated that “Policy uncertainties associated with global elections have increased”. The Bank’s financial stability report said that questions about a country’s political direction can increase geopolitical risk, increase government borrowing rates, and further fragment the global economy. This is “relevant to UK Financial Stability”, according to the report.
The FPC stated that it would continue to monitor the impact of high interest rates on UK households and businesses, as the Bank’s monetary policies committee had held rates at 5.25% for seven consecutive months .
This includes 400,000 households, whose mortgage payments will increase by 50% when they move off fixed rates from now until the end of 2026.
About 35% of mortgage holders still have fixed rates below 3%, and their payments are expected to increase over the next two-years.
If headline interest rates fall as predicted by the markets, 2 million additional mortgage holders – including those with variable rates or who are coming off of mortgages at higher levels – may benefit. This could offset refinancing for some households.
Concerns are also raised about the financial system’s exposure to the $8tn Private-Equity Industry, which boomed in a time of low interest rates and is now a major player in the financing of UK businesses.
The FPC noted that the industry was facing challenges as a result of the rising interest rates. This is evident when firms are forced to refinance debt at higher prices.
The FPC also said that it found “gaps in the management of UK banks’ exposure to private equity.” The Bank of England said it was working with the Financial Conduct Authority to improve transparency regarding borrowing levels and valuations of private equity firms and their investments.
The UK banking sector will continue to be tested by policymakers, who revealed that they would test it against two distinct and “severe economic shocks”.
First, a “supply shock scenario” would see inflation and interest rates soar by 12% and 9 %, respectively. This is because geopolitical tensions would disrupt supply chains, and the prices of commodities around the world would soar.
The second “demand shock scenario” is similar to the lockdowns of Covid’s time. It assumes that global demand for goods and services will be in decline for an extended period, resulting in inflation and interest rates falling below 0.5%.
In both cases, the unemployment rate is expected to reach 8.5%, and commercial real estate values would drop by almost 50%.
The so-called desk based stress tests conducted this year are the second time they have been done without the input of individual banks. They were first launched in 2008 as a response to the financial crisis. The Bank of England won’t release results by bank, but it will publish an aggregate report at the end of this year.
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