Bailey warns geopolitical and trade tensions pose material risks to financial stability

Bank of England Governor Andrew Bailey told the Treasury Committee that elevated geopolitical uncertainty and rising trade tensions are "material considerations" for both financial-stability and monetary-policy decision making. In testimony that singled out transatlantic trade frictions and high-profile political shocks — including public remarks about Greenland and repeated tariff threats — Bailey said these developments have pushed the Bank to heighten its risk assessment.

"Geopolitical tensions and particularly trade issues, are an important part" of the Bank's financial-stability assessment, Bailey said, adding that the BoE's approach is one of vigilance rather than pre-emptive intervention. He told MPs he and his colleagues "have to remain very alert" and warned that recent calm in markets is not a reason for complacency: "Neither of them I take as a source of any assurance going forward. We have to remain very alert to these things." He also cautioned that no single event should be assumed to be the proximate trigger for systemic stress: "Now, that does not mean to say that I want say that any particular issue is trigger."

Bailey referenced the Bank's December financial stability report as the basis for the heightened concern. The report concluded that risks to the UK financial system had increased over the past year despite a period of relatively muted asset-price moves. That apparent disconnect has become a central preoccupation for BoE officials: while markets have absorbed a series of political shocks with less disruption than many expected, the possibility of a sudden repricing remains material.

Market indicators have shown signs of strain around recent flare-ups. Equities futures touched one-month lows, the US dollar entered a second day of decline and long-dated government bond yields rose sharply as investors recalibrated expectations for growth and safe-haven demand. Gold rallied as a classic flight-to-safety, even as overall asset-price movements remain more subdued than headline volatility might imply. Bailey noted market participants sometimes treat political threats as bluster, invoking what he described as the "TACO" approach — shorthand for "Trump always chickens out" — and pointed to episodes where authorities reconsidered tariff announcements: "After Liberation Day (tariff announcements) ... the U.S. authorities reconsidered. As a result, the market volatility that we saw ... calmed down."

For policy makers, the implications are concrete. Elevated geopolitical risk can lift risk premia across sovereign and corporate debt, impair market functioning in stress episodes, and complicate the transmission of interest-rate policy through bank lending and asset prices. The BoE is monitoring indicators such as equity futures, currency moves, term premia on government bonds and safe-haven asset flows for signs that heightened uncertainty is seeping into funding conditions or bank balance sheets.

Bailey framed the present stance as preparedness: the Bank is watching how markets price geopolitical shocks and what that means for financial institutions' resilience. A move from vigilance to active supervisory or policy measures would require evidence that tensions are materially affecting market functioning, credit provision or the capital and liquidity positions of banks. In the meantime, the BoE is flagging geopolitical and trade tensions as a growing background risk for the UK economy and financial system, underscoring the limits of market calm as a gauge of systemic safety.