BoE's Bailey: Geopolitical risks may be underestimated by markets
Bank of England (BoE) Governor Andrew Bailey stated that geopolitical uncertainty is a significant consideration in the central bank’s assessment of financial stability, warning that markets may be underestimating the risks associated with global political tensions and institutional challenges, according to Reuters.
Bailey said the BoE is closely monitoring how markets respond to geopolitical shocks, noting that reactions so far have been more muted than expected. He also highlighted potential spillovers to the UK economy from any threat to the independence of the US Federal Reserve (Fed), while stressing his personal confidence in Fed Chair Jerome Powell.
Adding to the assessment, BoE Deputy Governor Dave Ramsden said core government Bond markets have shown limited volatility so far this year. Ramsden noted that Gilt, US Treasury and Eurozone Bond markets remain relatively stable, with Japanese government Bonds standing out as an exception.
Key takeaways
The level of geopolitical uncertainty is a big consideration for BoE on financial stability.
We worry considerably about how markets react to geopolitical risks, they have been more muted than we expected.
There are substantial potential spillovers to UK from any threat to Fed independence.
Powell is a friend of mine and a man of the utmost integrity.
Market reaction
GBP/USD remains sustained on Tuesday, gaining 0.40%on the day to 1.3480 at the time of writing.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.