Uncertainty caused by a global wave of elections starting this weekend in France threatens to destabilize the UK financial system, the Bank of England has warned.
Officials are worried about the kind of policies newly elected governments may push in major economies, including the US, where Donald Trump is vying for another term as president ahead of November elections.
French President Emmanuel Macron’s shock announcement of parliamentary elections with a first-round vote on June 30, and a forecast for the far-right National Assembly party Marine Le Pen to make a big contribution, showed how political uncertainty can affect economic growth forecasts and cause volatility. in financial markets, which affects government debt prices, the bank’s Financial Policy Committee (FPC) said.
However, the sheer number of elections that have taken place this year is cause for concern, with more than 80 countries – more than half the world’s population – going to the polls this year. This includes the United Kingdom, where citizens will vote in a general election on July 4.
“Political uncertainty linked to upcoming elections has increased worldwide,” the bank said in a financial stability report. Questions about the country’s political direction could heighten geopolitical risks, raise government borrowing costs and lead to further global fragmentation in a way that is “relevant to the UK’s financial stability”, it said.
The FPC said it was still monitoring the impact of high interest rates on UK households and businesses, with the bank’s monetary policy committee holding rates at 5.25% for the seventh time in a row this month.
This includes 400,000 households whose monthly mortgage payments are expected to rise by 50% as they cut fixed rates between now and the end of 2026.
In total, about 3 million – or 35% – of mortgage holders still have fixed rates below 3% and their payments are set to jump over the next two years.
But if overall interest rates fall from August, as markets predict, an additional 2 million mortgage holders — including those with variable rate or higher-tier mortgages — could benefit, offsetting pressure on some households to refinance.
There are also concerns about the exposure of the financial system to the US$8 trillion private equity sector, which has boomed in a period of low interest rates and has become a major player in UK business finance.
“While the sector has been resilient to date, it faces challenges in a higher rate environment,” the FPC said, adding that this was becoming apparent as firms were forced to refinance their debt at much higher prices.
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The FPC said it also found “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 tackle a lack of transparency in the total amount of loans, as well as the valuation of private equity firms and their investments.
Politicians said they would continue to test the resilience of Britain’s banking sector, revealing they would test the industry against 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 soar to 12% and 9%, respectively, as geopolitical tensions disrupt supply chains and drive up the price of global commodities. float.
The second “demand shock scenario” – which bears similarities to the impact of the Covid-era lockdown – envisages a fall in demand for global goods and services, leading to inflation and interest rates falling below 0.5% for an extended period.
In both cases, unemployment is expected to peak at 8.5% and the real estate industry would take a big hit, with commercial property prices falling by almost 50%.
This year’s so-called desk-based stress tests are the second to be carried out without the participation of individual banks since they were launched ten years ago in response to the financial crisis in 2008. The Bank of England will not publish the results by individual banks, but will issue a summary report by the end of the year.