Bank of England Flags Global Debt Pressures Despite Market Stabilization

Ongoing Global Risks Underscore BOE’s Caution

The Bank of England’s latest financial stability review signals that global economic risks continue to pressure financial markets despite a recent period of stabilization.

The BOE warned traders that vulnerabilities remain due to geopolitical tensions, global trade fragmentation, and concerns over sovereign debt burdens in key economies, factors that could keep volatility elevated.

Market Volatility Eases but Bond Nervousness Persists

Markets faced a sharp sell-off in April after President Trump’s announcement of wide-ranging tariffs on U.S. exports, driving British 30-year borrowing costs to levels not seen since the late 1990s.

While equities have largely recovered, traders remain cautious as bond markets continue to price in higher borrowing needs in the U.S., UK, and other major economies.

In the UK, recent domestic events have also highlighted fragility, with British bond prices dropping after the government reversed welfare payment cuts following parliamentary pushback, raising concerns about fiscal discipline.

The Office for Budget Responsibility underscored that UK public finances are still “relatively vulnerable” post-pandemic, a key consideration for gilt traders.

UK Banking System Holds Firm, Supports Lending Capacity

The BOE highlighted that the UK’s domestic banking system remains resilient, maintaining lending capacity even during volatility. Despite April’s market stress, the gilt market continued to function efficiently, supporting trading liquidity.

The Financial Policy Committee has kept the counter-cyclical capital buffer unchanged at 2%, seeing no need for a domestic adjustment, helping banks maintain strong reserve levels to support credit flow during downturns.

BOE Mortgage Market Reform: Targeting Growth While Containing Risks

In a notable shift, the BOE relaxed mortgage lending restrictions to support growth while maintaining financial stability.

Individual lenders can now exceed the previous 15% high loan-to-income mortgage cap, though the sector-wide limit remains unchanged. Banks’ current aggregate share of these loans sits at 9.7%, well below the cap, with the BOE projecting an increase to around 11% by end-2025.

The adjustment, the first major change to post-2008 mortgage rules, is aimed at supporting first-time buyers, though the BOE noted that deposit requirements, not loan-to-income caps, remain the primary hurdle for most borrowers.

Outlook: Cautiously Stable with Attention on Global Debt

For traders, the BOE’s stability report suggests a cautiously stable near-term outlook, supported by a resilient banking system and operational gilt market.

However, ongoing global debt pressures and geopolitical risks could sustain bond market nervousness, with gilt yields sensitive to fiscal signals.

The BOE’s upcoming review of bank capital requirements in December will be a key watchpoint, but for now, system capital levels are considered “broadly appropriate,” providing a supportive backdrop for credit markets while maintaining focus on external risks.

More Information in our Economic Calendar.