The Bank of England is on alert for the reaction in financial markets to an anticipated rise in US interest rates for the first time since the financial crisis.
Threadneedle Street identified flows in and out of emerging markets as one area which was difficult to predict in the event of a rise by the US Federal Reserve at its meeting on 15 and 16 December. Janet Yellen, chair of the Fed, hinted last week that a rate rise was likely this month.
The Bank of England’s financial policy committee – set up to look for risks in the financial system – said there could be risks to stability from banks’ exposure to debt in emerging markets.
“Capital flows had been sensitive to diverging prospects for monetary policy around the world and there was a risk of further volatility in capital flows as that policy divergence progressed. Though the likelihood of a tightening in policy by US policymakers was widely expected, the market reaction to any decision by the FOMC to increase interest rates remained difficult to predict,” the record of the latest quarterly meeting of the FPC said.
“Given the size of UK banks’ exposures to emerging market economies, there were likely to be risks to UK financial stability associated with the rapid buildup in emerging market debt,” the FPC said. This is why it had incorporated a slowdown in emerging markets in to its annual stress tests of major lenders.
