Bank of England highlights risks of rising global trade barriers to UK financial stability

The Bank of England has issued a warning today that rising global trade barriers could potentially hamper global economic growth and destabilise the UK’s financial system.

In its biannual financial stability report, the central bank highlighted potential disruptions to cross-border capital flows and a diminished capacity for risk diversification, as reported by City AM.

Although the Bank did not directly mention the threat of US tariffs, concerns over American trade policy have escalated since Donald Trump's presidential victory earlier this month. During his campaign, the president-elect proposed flat tariffs of 20 per cent on all imports and 60 per cent on those from China.

The Bank cautioned: "Global fragmentation, namely a reduction in the degree of international trade and policy co-operation, could have several consequences," It added: "For the macroeconomy, it could weigh on growth and increase the uncertainty of economic outcomes including around inflation, which could in turn feed into volatility in financial markets. " The Bank also warned: "A reduction in the degree of international policy cooperation could hinder progress by authorities in improving the resilience of the financial system and its ability to absorb future shocks."

These warnings come after Bank governor Andrew Bailey urged prioritising free trade and avoiding protectionism to bolster economic stability.

Addressing City financiers at Mansion House earlier this month, he urged policymakers to "please remember the importance of openness", highlighting that trade barriers resulting from Brexit had "weighed on the level of potential supply". The Bank's stability report released today indicates that UK households, businesses, and banks are in robust condition; however, it pointed out that the financial sector is exposed to risks "particularly relevant" due to the UK economy's openness.

The Bank also cautioned that financial markets could be "vulnerable to a sharp correction" driven by growth and inflation risks, as well as uncertainty surrounding interest rates. Such a downturn could be exacerbated by "long-standing vulnerabilities in market-based finance", potentially leading to higher borrowing costs for UK households and businesses.