Trump's trade war risks global financial crisis, Bank of England warns
The Bank of England has warned that Donald Trump's trade war leaves the world more exposed to a financial and economic crisis.
A steep rise in global tariffs beginning at 5am on Wednesday 'had contributed to a material increase in the risks to global growth', according to the Bank's Financial Policy Committee (FPC), adding that tit-for-tat action risked 'harming financial stability'.
'The global risk environment has deteriorated, and uncertainty has intensified,' the committee warned.
'The probability of adverse events, and the potential severity of their impact, has risen.'
The FPC, which is led by the Bank's Governor, Andrew Bailey, added: 'The risk of further sharp corrections remains high.'
Policymakers also warned that renewed market turmoil raised the risk of countries falling into a debt spiral as governments struggle to escape a doom loop of low growth and rising borrowing costs.
The FPC said: 'Risks associated with debt sustainability concerns, including sharp increases in government bond yields, could crystallise relatively quickly, particularly if accompanied by rapid capital outflows. Increased debt levels and servicing costs for governments as debt was refinanced could also reduce their capacity to respond to future shocks.'
The US president's sweeping duties include a 104pc tariff on China, the world's second largest economy as well as levies of up to 50pc on other nations, including some of its biggest trading partners.
The FPC warned that Mr Trump's actions would have severe implications for the global economy.
Minutes of its latest meeting warned: 'A major shift in the nature and predictability of global trading arrangements could harm financial stability by depressing growth.'
It warned that the outlook for inflation also remained uncertain, with many economists predicting the Trump administration's tariffs will push up prices and limit the ability of the US Federal Reserve to cushion a growth shock by cutting interest rates.
The committee also warned that the UK was particularly exposed to financial shocks because of its open economy and large financial sector. Rachel Reeves, the Chancellor, said on Tuesday that she was in close contact with Mr Bailey about developments in financial markets and the economy.
The Bank repeated a previous warning that high debt levels around the world had left countries vulnerable to financial shocks.
It warned that banks should start to wargame for such events.
'Higher government bond yields would also increase the cost of borrowing and refinancing of debt for households and businesses,' it said
Despite the market turmoil, the FPC said it believed that the British banking sector remained resilient with capital buffers that were big enough to withstand a major shock.
Overall household debt levels have fallen to their lowest since the start of the millennium, it noted.
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