Bank of England warns of global election risks to financial stability

Bank of England warns of global election risks to financial stability
credit: bloomberg

London (Parliament News) – Tension caused by a global wave of elections, beginning this weekend in France, risks destabilising the UK’s financial system, the Bank of England has cautioned.

How could global elections impact the UK’s financial stability?

Officials are worried about the kind of policies that newly elected governments may implement in large economies, including the US, where Donald Trump is competing for another term as president in the run-up to the election in November. French President Emmanuel Macron’s surprise announcement of a parliamentary election, with a first round of voting on 30 June and Marine Le Pen’s far-right National Rally party prediction to make significant progress, had shown how political uncertainty could affect economic growth forecasts and cause volatility in financial markets, involving government debt prices, the Bank’s financial policy committee (FPC) said.

How many countries are holding elections this year globally?

But it is the sheer number of elections carrying place this year that was cause for worry, with more than 80 countries – more than half the world’s population –leading to the polls this year. That includes the UK, where residents will vote in a general election on 4 July.

What risks do upcoming elections pose to economic forecasts?

“Policy uncertainty associated with upcoming elections globally has increased,” the Bank’s financial stability report stated. Questions over a country’s political direction could amplify geopolitical threats, increase government borrowing costs, and lead to different global fragmentation, in a way that was “relevant to UK financial stability”, it stated.

Are UK interest rates affecting households and businesses?

The FPC expressed it was still monitoring the effect high interest rates were having on households and businesses in the UK, with the Bank’s monetary policy committee having maintained rates at 5.25% this month for the seventh straight time.

That includes the 400,000 families whose monthly mortgage payments are anticipated to soar by 50% as they roll off selected rates between now and the end of 2026. In total, about 3 million – or 35% – of mortgage holders are still on specified rates of below 3% and are due to witness their payments bounce over the next two years.

What challenges does the private equity sector face in the UK?

There are also worries about the financial system’s exposures to the $8tn private equity industry, which roared during a period of low interest rates and has evolved to play a significant role in funding UK businesses. “Although the sector has been resilient so far, it is meeting challenges in the higher rate environment,” the FPC stated, noting this was becoming evident as firms were compelled to refinance their debt at much higher prices.

How is the Bank of England preparing for economic shocks?

The FPC stated it had also found “gaps” in the way UK banks were controlling their exposure to the private equity industry. The Bank of England and the Financial Conduct Authority expressed they were working together to manage a lack of transparency in overall borrowing levels, as well as the valuation of private equity companies and their investments.

Policymakers stated they would continue to test the strength of the UK’s banking sector, revealing they would be pushing the industry against the possibility of two separate and “tough” economic shocks.

The first – a “supply-shock scenario” reflecting the ripple effects of Russia’s invasion of Ukraine – would drive inflation and interest rates to skyrocket to 12% and 9%, respectively, as geopolitical pressures disrupt supply chains and cause the price of global commodities to skyrocket.

The second “demand-shock scenario” – which has parallels to the impact of COVID-era lockdowns – considers the demand for global goods and services in downfall, sending inflation and interest rates below 0.5% for a lengthy period.

In both cases, unemployment is cast to peak at 8.5% and the property industry would take a major hit, with commercial real estate costs declining by nearly 50%.

Federica Calabrò

Federica Calabrò is a journalist at Parliament News, She is covering Business and General World News. She is a native of Naples, commenced her career as a teller at Poste Italiane before following her passion for dance. Graduating in classical dance, she showcased her talents with two entertainment companies, enchanting audiences throughout Italy. Presently, Federica serves as the general secretary at the Allianz Bank Financial Advisors financial promotion center in Naples. In this capacity, she manages office forms, provides document assistance for Financial Advisors, oversees paperwork for the back office, and ensures smooth customer reception and assistance at the front office. Outside her professional obligations, Federica indulges in her passion for writing in her leisure time.