By David Milliken and Suban Abdulla
LONDON, Oct 2 (Reuters) – Global asset prices remain stretched and are vulnerable to a big fall as investors grow more concerned about geopolitical risks, the Bank of England said on Wednesday.
The BoE stated that overall risks to British financial stability were unchanged compared to its previous assessment in June but cautioned against drawing comfort from a rapid rebound in asset prices after an August decline.
“Valuations across several asset classes, particularly equities, quickly returned to stretched levels following the episode. Markets remain susceptible to a sharp correction,” the BoE’s Financial Policy Committee remarked in a quarterly statement.
Weak U.S. employment data and softer-than-expected results from major tech companies caused a market sell-off in August, which only reversed following stronger macroeconomic data—the BoE warned that investors should not count on similar boosts happening again.
The central bank remarked, “Global vulnerabilities remain material, as does uncertainty around the geopolitical environment and global outlook.”
A biannual BoE survey of major financial firms operating in Britain showed that concerns regarding geopolitical risk had reached their highest levels since the survey’s inception in 2008. This survey was based on responses from 55 firms between July 23 and August 12 and did not specify which sources of geopolitical risk were of greatest concern.
In addition to conflicts in the Middle East and Ukraine, attention remains on the upcoming U.S. presidential election.
The BoE noted that since June, hedge funds’ net short position in U.S. government bonds had escalated to $1 trillion from $875 billion. Should funds need to reverse these positions due to altered risk perception, losses, or other factors, this could lead to “severe” stresses.
The central bank also indicated that high levels of public debt across major economies might trigger financial stability risks if investors adopt a more pessimistic view on government borrowing.
British public debt has climbed to 100% of national income—mid-table by advanced economies’ standards—with Finance Minister Rachel Reeves set to present her first annual budget on October 30, following the Labour Party’s election victory on July 4.
Focusing on Britain, the BoE reported that most households and businesses were managing well with high interest rates, although some small businesses and private equity-backed firms were struggling.
In August, the BoE cut its main interest rate to 5% from a 16-year high of 5.25%, keeping it unchanged in September. Financial markets anticipate a 90% chance of a further reduction to 4.75% on November 7 after the BoE’s next meeting.
Lower interest rates imply that mortgage costs for households with expiring fixed-rate mortgages next year will increase less than earlier anticipated, according to the BoE. The overall debt interest burden would be significantly lower than during the global financial crisis.
The rise in mortgage costs for an average household is expected to be £150 a month, down from £180.
Last month, the central bank predicted the economy would grow by 0.3% per quarter in the second half of 2024, approximately aligning with Britain’s long-term growth rate, although this is less than in the first half of the year, which saw a recovery from a shallow recession that occurred in late 2023.
The FPC also stated that it is keeping the counter-cyclical capital buffer—used to manage risks in banks’ credit cycles—unchanged at 2%.
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