BoE Governor Andrew Bailey cautioned on Wednesday that risks tied to geopolitical tensions and the fragmentation of global trade and financial markets remain high. Speaking on the evolving macroeconomic development, Bailey said the world economy faces “material uncertainty,” and warned that some geopolitical threats have already begun to crystallize, impacting financial market behavior.
He noted a “notable change” in the usual correlations between the US Dollar and other US assets such as equities and Treasury yields. This breakdown, Bailey warned, increases the likelihood of sharp corrections in risk assets, abrupt shifts in allocation, and prolonged periods of market dislocation. Such dynamics could expose vulnerabilities in market-based finance and ripple into the UK by tightening the availability and cost of credit.
Bailey also stressed that trade fragmentation, while geopolitical in nature, has clear economic consequences. “Fragmenting the world economy is bad for activity,” he said, citing basic trade theory. The knock-on effects, he added, would likely weigh on employment and global growth.
