Ukraine war clouds economic outlook and puts borrowers under strain, warns Bank

The Ukraine war has increased economic uncertainty in the UK and will put pressure on borrowers as soaring energy prices compound the cost-of-living crisis, the Bank of England has warned.

In the Bank’s latest Financial Policy Committee (FPC) report, it said that if energy bills keep rising amid the conflict, this will put strain on household and business finances.

The FPC added that while Britain’s direct exposure to the Ukraine conflict is “limited”, there are indirect channels through which Russia’s invasion could pose risks to the financial system, and it could further disrupt supply chains, which may impact the UK and global economy.

But the Bank stressed the major UK banks remained strong enough to “withstand severe market and economic disruption”.

It added it was monitoring developments in the financial system closely and “stands ready to take any measures necessary to help ensure UK financial stability”.

The Bank said: “The invasion is increasing economic uncertainty and will increase pressure on borrowers.

“For example, sustained increases in energy prices resulting from the conflict are likely to put pressure on household incomes and business earnings.”

It said borrowers were still likely to be able to keep up with mortgage repayments, though it said their income resilience would be tested and lower-income families would be hit hardest.

The Ukraine conflict also poses risks to small firms, which have been left “more vulnerable than they were pre-Covid” to surging costs as they have taken on more debt amid the pandemic, though it confirmed debt payments remain affordable for most UK businesses.

It added: “There is considerable uncertainty about future developments in Ukraine and Russia. Further geopolitical developments could pose additional risks.

“The possibility of further second-order spillover effects impacting upon the UK financial system cannot be discounted.”

The Bank said the FPC was reviewing whether to go ahead with a planned rise in UK bank capital requirements, which was announced in December, in light of the greater economic uncertainty caused by Russia’s invasion of Ukraine.

It had been planning to increase the so-called counter-cyclical capital buffer (CCyB) to 2% from 1% from the second quarter.

The Bank said: “While domestic vulnerabilities that could amplify economic shocks have not changed materially since the December 2021 Financial Stability Report, uncertainty around, and downside risks to, the economic outlook have increased significantly following Russia’s invasion of Ukraine.

“Given this uncertainty, the committee will continue to monitor the situation closely and stands ready to vary the UK CCyB rate – in either direction.”

It has also put back the annual stress tests on the UK banking sector due to the uncertainty caused by the Ukraine war, with the sector’s health check now due to restart later this year having been paused during the pandemic.