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"The global economic outlook has deteriorated markedly. Global
financial conditions as a whole have tightened significantly,"
Bailey told a news conference after the BoE published its
half-yearly Financial Stability Report (FSR).
Developments around the war in Ukraine would also be key, the
BoE added.
International forecasters like the IMF and OECD say Britain is
more susceptible to recession and persistently high inflation
than other Western countries, all of whom are grappling with
global energy and commodity market shocks.
British banks were well-placed to weather even a severe economic
downturn, the BoE said, although it said their capital ratios -
while still strong - were expected to decline slightly in the
coming quarters.
Members of the Financial Policy Committee (FPC) confirmed that
the BoE will double the counter-cyclical capital buffer (CCyB)
rate to 2% July next year, and said it could vary the rate in
either direction depending on how the global economy pans out.
The CCyB rate represents an extra buffer for banks such as HSBC,
Barclays, Lloyds Banking Group and NatWest that varies depending
on the economic outlook.
Despite a worsening cost-of-living crunch, with inflation
heading towards double digits, the BoE said banks were resilient
to debt vulnerabilities among households and businesses.
The central bank also expressed unease over the health of core
financial markets - such as U.S. and British government bonds -
which were the subject of the March 2020 "dash for cash" when
the COVID-19 pandemic prompted panic selling.
"Amid high volatility, liquidity conditions deteriorated even in
usually highly liquid markets such as U.S. Treasuries, gilts and
interest rate futures," the BoE said.
It said core British markets - while still functional - had
become more expensive to trade, with bid-ask spreads on
short-dated gilts more than doubling compared with their 2021
average.
"(Conditions) could continue to deteriorate, especially if
market volatility increases further," the BoE said.
The BoE also said it would conduct an in-depth analysis of the
functioning of the commodities market, with metals trade
severely disrupted in March by Russia's invasion of Ukraine.
The central bank said it would begin its 2022 stress test of
banks - delayed due to the war - in September, with the results
likely to come in mid-2023.
(Additional reporting by David Milliken and William James,
Editing by Angus MacSwan)
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