The war in Ukraine blurs Britain’s economic prospects and puts borrowers and the poorest under pressure, warns Bank of England

That Ukraine war has increased economic uncertainty in the UK and will put pressure on borrowers as soaring energy prices exacerbate the cost-of-living crisis, the Bank of England has warned.

The Bank’s key fiscal policy committee (FPC) said that if energy bills continue to rise in the midst of the conflict, this will put pressure on household and business finances. It warns poorer families will struggle hardest from the cost of living pressure.

The FPC monitors risks to financial stability. Its latest report states: “An increase in the cost of living, partly due to rising energy and other import prices, is likely to affect the resilience of households across income distribution, with a greater impact on lower-income households spending a greater share of their income on energy and other essential things. “

Borrowers were probably still able to keep up with mortgage payments, but the FPC said their income resilience would be tested and lower-income families would be hardest hit.

While Britain’s direct exposure to the Ukraine conflict is “limited”, officials warn of indirect effects that Russia’s invasion could pose risks to the financial system and could further disrupt supply chains, affecting the UK and global economy.

The conflict posed particular risks to small and medium-sized enterprises, which have become “more vulnerable than they were before Covid” to rising costs as they have taken on more debt in the midst of the pandemic.

“Companies in sectors most affected by rising energy prices will also face a major cost shock,” it warns.

The sharp rises in financing costs that households and businesses are facing could pose risks, the FPC said.

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“Tight overseas credit conditions could affect UK companies’ ability to raise or transfer funding in both overseas and domestic markets.” added it.

Experts stressed that the major UK banks remained strong enough to “withstand severe market and economic turmoil”.

The bank said it had postponed its annual stress tests of UK banks, designed to ensure they are strong enough to handle a financial crisis, citing uncertainty surrounding the fallout from the Ukraine war. The health check will restart later this year after being suspended during the pandemic.

“There is considerable uncertainty about future developments in Ukraine and Russia. Further geopolitical developments may pose additional risks. The possibility of further second-order spillover effects affecting the UK financial system cannot be ruled out,” it said.

The bank report highlighted an “increased risk of cyber threats” from Russian state hackers.

“The FPC welcomes the actions of the National Cyber ​​Security Center to ensure that the UK financial system is well prepared for such attacks,” it said.

The bank’s report said it was closely monitoring developments in the financial system and “is ready to take all necessary measures to ensure financial stability in the UK”.

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