Bank governor says further ‘global shocks’ the biggest threat to UK economy

The governor of the Bank of England has said further “global shocks” are a major threat to the UK economy as he told MPs he is monitoring the situation in the Red Sea closely amid concerns over oil supplies.

Andrew Bailey also said he was hoping to see mortgage costs continue to fall after the Bank paused hiking interest rates.

Speaking to a group of MPs during a Treasury Committee session, the Bank chief said he thought there was clearly the “potential for further global shocks” when asked about the top threat facing the UK economy this year.

He said the Bank was closely monitoring the situation in the Red Sea.

It comes after attacks by Iran-backed Houthi rebels on cargo ships in the critical trade route through the Suez Canal, causing some vessels to have to reroute over safety concerns.

Oil giant BP said last month it was pausing all shipments of oil through the Red Sea because of the threat of attacks.

Mr Bailey said: “We’ve certainly seen – as best we can tell from the monitoring – shipping traffic is being affected and is being rerouted. That will increase shipping prices and shipping costs.

“I think initially that will be an issue in the monetary policy world.”

He said there has fortunately been no “prolonged spike” in oil prices as a result.

“We have to watch it very carefully, though, because it is obviously having an effect,” he told the committee.

Sarah Breeden, the deputy governor for financial stability at the Bank, said “uncertainty” was a major threat, such as about the macroeconomic environment, geopolitical tensions, credit risks and unemployment.

We've now had quite a big change in market interest rates in recent months, so that the cost of mortgages is coming down

“The risk environment at the moment feels particularly challenging … I do think the set of circumstances that we currently face are extraordinary,” she told MPs.

Elsewhere in the session, Mr Bailey was asked about how UK households were faring in the current climate of higher interest rates.

The governor said: “We’ve now had quite a big change in market interest rates in recent months, so that the cost of mortgages is coming down.

“Let’s just take the market for the moment – obviously that is feeding through into mortgage costs and I hope that is something that continues.”

He added: “I think the rental market is more stretched because you’ve got a higher proportion of low-income households in the rental market.

“Rental inflation is currently around 6% … I really hope that’ll come down and lower interest rates obviously help that as well.”

Mr Bailey underlined that individual circumstances will be different and that the Bank recognises there are people in the UK experiencing “very difficult circumstances” amid the higher cost of living.