Global macro outlook "more uncertain", says Bank of England

The Bank of England has warned that the global economic outlook has become more uncertain and risks have increased, while a potential sharp correction in asset prices could hike the cost of borrowing.

In its Financial Stability Report on Friday, the central bank said risks linked to geopolitical tensions, increased protectionism and diverging international policy, and elevated government debt levels "remain material".

"Uncertainty around, and risks to, the global economic outlook have increased. As the UK is an economy with a large financial sector and in which trade is significant, these risks are particularly relevant to UK financial stability," the report from the Financial Policy Committee (FPC) said.

The Bank noted that long-term borrowing costs in the UK and US in particular have increased after the recent Autumn Budget and American presidential elections, while reduced confidence in the long-term sustainability of public debt levels could lead to higher rates and sharp movements in market prices.

The FPC called on banks and others in the financial sector to prepare for these risks, since increased government debt levels could "reduce their capacity to respond to future shocks, and increase the cost of borrowing and refinancing of debt for households and businesses".

Meanwhile, the Bank highlighted that prices of riskier assets like stocks have risen in recent months despite the increased macro risks mentioned above.

"These risks make it more likely that there could be a sharp decrease in asset prices that could ultimately make it more costly and difficult for UK households and businesses to borrow. Such a decrease could be made worse by existing vulnerabilities in non-bank finance," the BoE said.