Donald Trump’s sweeping tariffs have put global growth at risk, the Bank of England has warned, heaping pressure on government finances and increasing the likelihood of “severe shocks” to the financial system.
The Bank’s financial policy committee (FPC) said its global risk environment had deteriorated and “uncertainty had intensified” since its last update in November, with US tariff announcements contributing to a “material increase in risks to global growth” and inflation levels.
It said those concerns had knocked investor confidence, and increased the risk of a “further sharp correction” in financial markets that could cause stress for indebted companies and make it harder for governments to borrow money and refinance their debts.
The Bank warned that higher government bond yields – effectively the interest rate countries pay on their debt – would “reduce their capacity to respond to future shocks”.
Government bonds, including traditionally safe haven US treasuries, have been undergoing a sell-off since Trump announced his 10% tariffs on all imports to the US over the weekend. That accelerated on Wednesday after Trump announced a fresh wave of tariffs on dozens of countries at 00.01 eastern US time. The latest levies included a 104% import tax on Chinese products, which prompted Beijing to hit back with plans to impose an 84% border tax on US goods.
The FPC said that a big shift in the nature and predictability of global trade could also reduce the likelihood of international cooperation, particularly in tackling global challenges and shocks, “which could reduce resilience of the financial systems”. Overall, “severe shocks are more likely”, the committee warned.
High geopolitical tensions would also have implications outside global trade, the FPC said, creating a heightened risk of cyber-attacks that could amplify other stresses and disrupt payments and financial services to UK households and businesses.
It said that since its last meeting in mid-November “global trade policy uncertainty had intensified and some risks had crystallised. The United States had made a wide range of tariff announcements on 2 April and some governments had responded with their own tariff announcement. This had contributed to a material increase in the risks to global growth and a weakening of the central outlook, as well as increased uncertainty over the outlook for inflation globally.”
The comments came as the UK’s chancellor, Rachel Reeves, and the City minister, Emma Reynolds, met chief executives of the UK’s leading banks, asset managers and investment companies on Wednesday morning.
Reeves told bosses – including the Lloyds Banking Group chief executive, Charlie Nunn, the Legal & General CEO, António Simões, and Hargreaves Lansdown’s Dan Olley – that she was committed to reducing trade barriers and “pursuing the best deal with the United States that is in our national interest”, the Treasury said.
The FPC’s warnings were echoed by the Bank of England deputy governor Clare Lombardelli, who on Tuesday warned that tariffs would depress economic activity, having already increased uncertainty and hit asset prices.
Meanwhile, José Luis Escrivá, the governor of the Bank of Spain and a member of the European Central Bank’s governing council, has warned that tariffs are triggering a “very significant negative shock on economic activity”.
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He told the Financial Times: “Some of the worst-case scenarios that we had identified are materialising.”
The investment bank JP Morgan believes there is a 60% chance of the world economy entering recession by year-end, while the a poll of economists released by the FT suggested that the UK was expected to grow by only 0.8% this year, down from the 1.2% expected in January.
Germany’s finance minister, Jörg Kukies, said on Wednesday that the country’s economy was at risk of another recession as a result of the trade tensions.
However, the Bank of England tried to ease some fears on Wednesday, stressing that financial markets were operating in an orderly fashion and that the UK banking system remained resilient.
The financial policy committee said it would keep an eye on developments and “stood ready” to provide extra support if needed, including by changing the size of rainy day funds known as the countercyclical capital buffer.
Banks are currently required to hold a buffer worth about 2% of the risky assets on their balance sheets. That rate could be cut if it became clear that banks were starting to withhold cash and “restrict lending by more than was warranted by the macroeconomic environment”.
