The Bank of England warns the UK of the risk of a credit crunch amid market risks
The Bank of England has issued a stark warning that the UK could face a debt crisis, as financial markets remain vulnerable to a “hard correction.” Policymakers have warned that a sudden crash in global markets could significantly increase the cost of borrowing for UK households and businesses.
The Financial Policy Committee (FPC), chaired by governor Andrew Bailey, has flagged several global risks, including concerns about economic growth, rising tensions in the Middle East, and a big bet against US bonds ahead of the November election. These factors contribute to the crisis in global markets.
The FPC stressed that although interest rates have started to fall, potentially easing the burden on the 3 million UK households who have yet to regain expensive fixed-price mortgages, markets are still volatile. Equity price estimates were described as “stretched,” and the committee warned that a market correction could reduce credit availability.
World risks, especially the recent conflict between Israel and Iran, have caused oil prices to rise and weigh on US stock markets. The Bank’s systemic risk survey revealed that financial managers view political instability as their biggest concern, ahead of cyber attacks and the UK recession.
However, the Bank has seen some relief for homeowners. About 1.7 million borrowers have benefited from the reduction in the Bank’s base rate to 5%, and the cost of borrowing has come down. Another 3 million borrowers are expected to refinance in 2027, and those who refinance in the following year are expected to see a smaller increase in monthly payments than previously predicted.
In addition to UK market risks, the Bank has expressed concern over the increase in hedge fund bets against the US Treasury, which have risen to more than $1 trillion. The FPC warned that the withdrawal of these trades could exacerbate future market stress.
Financial market volatility was highlighted by a sell-off in stocks in August, triggered by weaker-than-expected US jobs data and the end of Japan’s era of cheap borrowing. Although the volatility has been short-lived, it has revealed significant global risks and a disconnect between share ratings and growth concerns.
The Bank urged financial institutions to prepare for major market shocks and acknowledged that the current economic situation remains uncertain, with markets still vulnerable to sudden downturns.
