Bank warns of global markets crash if investors panic over inflation
GLOBAL stock markets are at risk of crashing if investors panic over stagnation and higher interest rates, the Bank of England has warned.
Officials at Threadneedle Street said there is a danger that share prices will “correct sharply” in coming months following a spate of risky bets by investors.
It comes amid fears of an inflationary spiral as labour shortages and a surge in energy costs push up the price of everything from toys to steel. There are signs that increases are becoming embedded in the labour market, with starting salaries rising at their fastest rates in 24 years, according to a survey released yesterday by the Recruitment and Employment Federation.
A report by the Bank’s Financial Policy Committee (FPC) said that a rally, which has pushed share prices to record highs, “partly reflects the improved economic outlook, but may also reflect a ‘search for yield’ and higher risk-taking in a low interest rate environment”.
It added: “Asset valuations could correct sharply if, for example, market participants re-evaluate the prospects for growth, inflation or interest rates.”
Fears are growing that the West will be plunged into a bout of so-called stagflation, where prices rise but economic growth remains sluggish. This risks sparking a cost-of-living crisis and destroying the value of assets, forcing central banks to combat the increases by raising interest rates. The US stock market sagged last month, stumbling from record highs amid worries high inflation will prove stronger and longlasting than had been expected.
In Britain, households are facing particular pressure as energy prices surge and driver shortages exacerbate supply problems. On Thursday, Huw Pill, the Bank of England’s new chief economist, warned the duration and scale of price increases was “proving greater than expected”. Further data released by the Bank and the Financial Conduct
Authority showed that one fifth of UK mortgage holders would be exposed to a rise in the interest rate.
More than 21pc of outstanding residential mortgages had variable rates at the end of June, which could climb if the benchmark is lifted, piling further cost-of-living pressures on 1.9m households. Collectively, vulnerable households are sitting on home loans worth more than £300bn.
Money markets are pricing in the first rate increase by the end of the year, lifting it off its all-time low of 0.1pc. Further increases are expected by September, taking the rate to 0.75pc.
UK bond yields hit their highest level relative to German bunds since 2016 yesterday, a signal that traders expect inflation in Britain to outstrip Europe’s top economy over the coming decade.
The Bank added that there are signs that investment banks are beginning to take on more debt, though officials stressed the UK’S financial system is sufficiently resilient to potential shocks.