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Most British companies would withstand sharply higher tariffs even if their earnings fell 10 per cent and their borrowing costs surged, according to the Bank of England’s assessment of risks from US President Donald Trump’s trade war.
“Despite some pockets of vulnerability, UK corporates would, in aggregate, be able to service their debts even in the face of further global shocks such as lower global demand and supply,” the BoE said in its latest financial stability report published on Wednesday.
UK companies that are more exposed to the risk of a trade shock account for about 60 per cent of jobs in the country but only 30 per cent of corporate debt, which the central bank said showed they typically have borrowed less than other companies.
Trump said this week that Washington would impose 50 per cent tariffs on copper, sending US prices of the industrial metal soaring to record levels, in the latest escalation of his trade war.
Only the UK has secured any form of relief from the US sectoral tariffs. As part of its recent deal with the US, Britain was granted a reduced tariff of 10 per cent on an annual quota of 100,000 cars, instead of the 25 per cent tariff applied to most countries.
“The outlook for UK household and corporate resilience remains strong in aggregate, and it would take significant macroeconomic shocks for aggregate debt servicing measures to deteriorate materially,” it said.
However, officials warned that some heavily indebted British companies reliant on market-based finance “are particularly exposed to global shocks”. They estimated that 10 per cent of market-based corporate debt would need refinancing in the next year.
The level of capital in the UK banking system was “broadly appropriate”, the BoE said, adding that its Financial Policy Committee would carry out an assessment of “the overall level of capital requirements” for the first time in five years.
The FPC had recommended regulators “amend implementation” of its mortgage-lending restrictions by allowing lenders to increase their share of high loan-to-income lending while remaining below the 15 per cent limit, the BoE said.
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Mortgages worth more than 4.5 times household income remained well below the FPC’s limit, despite rising to 9.7 per cent of total home loans in the first quarter. The committee forecast this share would rise to 11 per cent by the end of this year.
Risks to global financial stability were “still elevated” owing to geopolitical tensions, fragmentation of trade and financial markets and pressures on government debt markets, it said.
US stock markets slumped in April after Trump announced major “liberation day” tariffs on many trading partners. But the president’s decision to pause his most punishing tariffs has since prompted a rapid rebound by the S&P 500, which is now up more than 6 per cent this year.
The BoE said the recovery in equity markets meant “the risk of sharp falls in risky asset prices, abrupt shifts in asset allocation and a more prolonged breakdown in historical correlations remains high”.
After the dollar depreciated in recent months, breaking with its historical trend of rising when long-term bond yields increase, the central bank said more investors were hedging themselves to insure against further falls in the US currency.
It also highlighted rising concern about financing activity moving out of banks towards less regulated market-based providers, adding that this “could amplify” any asset price correction.
The BoE said it planned to consult on options to address vulnerabilities in repurchase, or repo, markets, in which investors raise money against UK gilts. It said hedge fund net borrowing in UK repo markets had risen to a record £77bn in June.
Officials would soon publish a discussion paper seeking views on “potential options to help mitigate gilt repo market vulnerabilities, including greater central clearing of gilt repo and minimum haircuts on non-centrally cleared gilt repo”, it said.
“While UK markets functioned well through the heightened period of volatility in April, this was to some extent a function of the relatively shortlived nature of the market disruption,” it said. “Vulnerabilities — though not unique to UK core markets — persist, in particular those linked to excessive leverage.”
