Exuberance, uncertainty and unexpected economic shocks are the biggest risks to financial stability this year, according to the Bank of England.
Representatives from the central bank appeared in front of the government’s Treasury committee today (January 10) where they were asked by chair Harriet Baldwin what the threats to financial stability were in 2024.
Jonathan Hall, external member of the Bank of England’s Financial Policy Committee, said a calmer market could see people taking more risks, affecting stability.
He said: “Although interest rates are expected to remain high, expected volatility has come down and so we should expect to see less risk of financial instability in the markets.
“What that could mean, if conditions seem calm and volatility is low, is then you could get a risk of exuberance.
“So people take on more risk because they think the market is more benign.”
However, governor of the Bank of England Andrew Bailey warned there was the risk of further shocks in an uncertain world.
He put any potential global shocks as his number one risk to financial stability in 2024.
Deputy governor, Sarah Breeden, echoed this saying the unknowns were the biggest risk this year.
She said this related to uncertainty not being priced properly in the market, including about the macroeconomic environment, geopolitics, credit risk and unemployment.
Breeden added: “The risk environment at the moment feels particularly challenging. It is a trite thing to say that the world is always uncertain, but I do think that the set of circumstances that we currently face are extraordinary."
While Carolyn Wilkins, also a member of the Financial Policy Committee, said her biggest worry would be an uptick in inflation coming from the risks mentioned by Breeden.
She said: “There are a lot of risks out there coming from the global economy, coming from geopolitical risks, that could create at once an uptick in inflation, and therefore the need for higher interest rates, but also a slowdown in economic activity.
“I think that combination given the vulnerabilities that are out there would be stressful from a financial stability point of view.”
In December, the bank held rates at 5.25 per cent for the third month in an effort to meet the 2 per cent inflation target.
tara.o'connor@ft.com
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