The uncertainty caused by a global election wave starting in France this weekend threatens to destabilize the British financial system, the Bank of England has warned.
Officials are concerned about the kind of policies newly elected governments can enforce in major economies, including the US, where Donald Trump is vying for another term as president ahead of the November election.
French President Emmanuel Macron’s shock announcement of parliamentary elections, with a first round of voting on June 30 and Marine Le Pen’s far-right National Rally party predicting significant gains, had shown how political uncertainty could affect economic growth forecasts and volatility could cause. on the financial markets, which affects government bond prices, according to the Bank’s Financial Policy Committee (FPC).
But the sheer number of elections taking place this year is cause for concern: this year more than 80 countries – more than half the world’s population – will go to the polls. That includes Britain, where citizens will vote in the general election on July 4.
“Policy uncertainty surrounding the upcoming elections worldwide has increased,” the Bank’s financial stability report said. Questions about a country’s political direction could increase geopolitical risks, raise government borrowing costs and lead to further global fragmentation, in a way that is “relevant to financial stability in Britain”, the report said.
The FPC said it was continuing to monitor the impact of high interest rates on UK households and businesses. The Bank’s monetary policy committee this month kept rates at 5.25% for the seventh time in a row.
This also applies to the 400,000 households whose monthly mortgage costs are expected to rise by 50% as the fixed interest rate is phased out between now and the end of 2026.
There are also concerns about the financial system’s exposure to the $8 trillion private equity sector, which boomed during a period of low interest rates and has come to play an important role in financing British companies.
“While the sector has been resilient to date, it faces challenges in the higher interest rate environment,” the FPC said, noting that this became apparent as companies were forced to refinance their debt at much higher prices.
The FPC said it had also identified “gaps” in the way UK banks managed their exposure to the private equity sector. The Bank of England and the Financial Conduct Authority said they were working together to address the lack of transparency in overall lending levels, as well as in the valuation of private equity firms and their investments.
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Policymakers said they would continue to test the resilience of the UK banking sector, revealing they would test the sector for the possibility of two separate and “severe” economic shocks.
The first – a ‘supply shock scenario’ reflecting the ripple effects of Russia’s invasion of Ukraine – would see inflation and interest rates rise to 12% and 9% respectively, as geopolitical tensions disrupt supply chains and drive up the price of global commodities . to rise.
The second ‘demand shock scenario’ – which has similarities to the impact of Covid-era lockdowns – assumes that demand for global goods and services declines, keeping inflation and interest rates below 0.5% for an extended period of time .
In both cases, unemployment is expected to peak at 8.5% and the real estate sector will take a major hit, with commercial real estate prices falling by almost 50%.
This year’s so-called desk-based stress tests are the first to be conducted without input from individual banks since they were launched a decade ago in response to the 2008 financial crisis. The Bank of England will not release bank-by-bank results, but will issue a comprehensive report by the end of the year.