UK more vulnerable to financial shocks than most: BOE

Bloomberg

The UK is more vulnerable to financial shocks than most other nations, a Bank of England (BOE) study concluded, indicating that openness to trade and banking poses some risks.
Britain has more foreign assets and liabilities than any other major economy and relies on trade for 60% of its gross domestic product (GDP), more than the average across other industrial nations, according to the paper by five officials at the central bank.
The researchers concluded that developments abroad accounted for half the change in GDP and almost all the variation in financial conditions between 1997 and 2019. It’s a reminder that the City of London’s banking sector because of its size can feed turmoil in markets into the UK economy more quickly than in other countries.
“Openness could be a double-edged sword,” the researchers wrote in a paper published in the BOE’s quarterly bulletin. “The openness brings many benefits but also means that events abroad can significant affect both the outlook for the UK economy and the resilience of the financial system.”
The paper covered the period thorough the global financial crisis a decade ago, when a credit crunch in the US mortgage market tightened borrowing conditions worldwide. The UK eventually was forced to nationalise institutions like Northern Rock and Royal Bank of Scotland as a result.
The UK is most affected by developments in the euro area and the US. The UK-based banks’ foreign claims are 60% higher than those in the US and 20% higher than those in France and a third of UK corporate borrowing comes from overseas markets.
Meanwhile, a BOE policy maker said markets are right to price in an earlier interest-rate hike than previously expected as inflation accelerates.
Michael Saunders, a member of central bank’s Monetary Policy Committee, was quoted as telling the Telegraph he’s concerned that capacity pressures and higher pay growth are driving an inflation pickup that “could become more persistent unless monetary policy responds.”
“I think it is appropriate that the markets have moved to pricing a significantly earlier path
of tightening than they did
previously,” said Saunders.
Saunders has emerged as one of the more hawkish BOE officials in the past few months and his comments will vindicate investors who are betting on an imminent rate hike, though he said he’s wary of telegraphing the bank’s intentions “too precisely.”