MNI BOE: Probability Of Sharp Fall In Risky Asset Prices High

The Bank of England Financial Policy Committee said that the likelihood of sharp falls in risky assets remained high and that overall financial risks were still elevated, but that the domestic picture was more stable with some signs that UK household finances have improved.

The record of the FPC's June 27 meeting, published alongside the Financial Stability Report, stated that term premia had risen globally and "the risk of sharp falls in risky asset prices, abrupt shifts in asset allocation and a more prolonged breakdown in historical correlations remains high."

Any sharp moves could be amplified by weaknesses in market based finances, the FPC warned, with geopolitical tensions and trade fragmentation fueling the risks.

The FPC said market contacts reported that foreign investors had increased hedging on US assets by selling dollars and that hedge funds, expecting this hedging to continue, were feeding the spiral by increasing their positioning anticipating further dollar weakening.

This has fed through to the breakdown in traditional asset and market correlations and the FPC warned investors against placing weight on such previous correlations.

The report noted one encouraging sign, that even during the peak of the debt market weakness  in the Spring, there was no net selling of gilts, adding that operational resilience in core debt and repo markets was sustained throughout Q2.

RESILIENT UK HOUSEHOLDS

While global risks were elevated UK household finances looked rosier than previously expected.

Fewer borrowers were set to move on to higher rate mortgages over the next three years than previously assumed and in aggregate the share of household income spent on mortgage repayments is not expected to rise significantly.

A high proportion of UK household are on fixed mortgages of up to 5 years and as they refinanced, many were expected to be hit by higher mortgages costs but the updated estimate in the FSR found 41% of mortgage accounts would move on to higher rates over the next three years, down from November's 50% estimate.

The UK banking system was seen as still being in a strong position to support households and business although further analysis would be undertaken for the Autumn report.

The FPC left banks' countercyclical capital buffer (CCyB), the rainy day buffer against shocks, at 2% with no indication of whether it was more likely to move up or down. 

According to the BOE, bank CET 1 ratios were 14.4%, with the liquidity ratio at 153%.