Bank of England's McCafferty: rising inflation might slow economy

Bank of England's McCafferty: rising inflation might slow economy

Bank of England's McCafferty: rising inflation might slow economy

This scenario will form part of the stress tests the central bank is set to run in 2017, the inputs for which were revealed on Monday morning.

The annual test will probe the impact of a potential drop-off in global investor sentiment after sterling collapsed and bond yields soared in the wake of the referendum.

Last year, RBS had to bolster its finances by about £2bn after failing the last stress test.

The so-called "exploratory" scenario will incorporate "severe and synchronised" stress to both the British and global economy and financial markets, with weak growth, low interest rates, stagnant trade and cross-border banking activity.

This year banks will be tested against a 4.7% fall in GDP, interest rates of 4% and a 33% fall in house prices.

"To do this they need to ensure that the borrower can afford to repay their loan without falling into debt ... and make sure that people who are borrowing money understand the full cost of their loan so they can make informed decisions about whether to take on additional credit".

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The Bank of England (BoE) said Brexit, along with household debt and China's economy, is among the main risks to United Kingdom financial stability, though it's no longer the top threat. It said lenders should have plans in place to cope with a variety of possible outcomes from the coming talks.

The bank noted subdued global growth, persistent uncertainty over worldwide trade policies across the developed world, the United Kingdom's high private debt and uncertainty surrounding the final UK-EU post-Brexit trade deal as the risks facing the country's financial system.

While the the FPC said the risk outlook to the global financial system was "broadly unchanged", it noted "policy uncertainty is high across a range of advanced economies".

"Sudden adjustment could disrupt the provision of market liquidity and investment banking services", the BoE said.

The Bank also pointed to the growing backlash against worldwide trade and integration of the global financial system as a major risk.

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