British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration/File Photo
Reuters - July 5, 2022

The Bank of England warned on Tuesday that the economic outlook for Britain and the world had darkened and told banks to ramp up capital buffers to ensure they can weather the storm.

"The economic outlook for the UK and globally has deteriorated materially," the BoE said as it published its latest Financial Stability Report, adding that developments around the war in Ukraine would be a key factor.

International forecasters like the IMF and OECD say Britain is more susceptible to recession and persistently high inflation than other Western countries, all of whom are grappling with global energy and commodity market shocks.

British banks were well-placed to weather even a severe economic downturn, the BoE said, although it noted their capital ratios - while still strong - were expected to decline slightly in the coming quarters.

Members of the Financial Policy Committee (FPC) confirmed that the BoE will double the counter-cyclical capital buffer (CCYB) rate to 2% July next year, and said it could vary the rate in either direction depending on how the global economy pans out.

The CCYB rate represents an extra buffer for banks that varies depending on the economic outlook.

Despite a worsening cost-of-living crunch, with inflation heading towards double digits, the BoE said banks were resilient to debt vulnerabilities among households and businesses.

The central bank also expressed unease over the health of core financial markets - such as U.S. and British government bonds - which were the subject of the March 2020 "dash for cash" when the COVID-19 pandemic prompted panic selling.