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Further "global shocks" are a major threat to the UK economy, Bank of England (BoE) governor Andrew Bailey has told MPs, amid concerns over oil supplies following violence and disruption on Red Sea shipping routes.
Speaking to MPs on the Treasury Select Committee, Bailey said he was hoping to see mortgage costs continue to fall after the Bank paused hiking interest rates last year.
However, when asked about the top threat facing the UK economy in 2024, he also highlighted the clear "potential for further global shocks". The BoE is now monitoring the situation in the Red Sea closely, he said, after an escalation in attacks by Iran-backed Houthi rebels on large container ships in the critical trade route through the Suez Canal.
Oil giant BP said last month it was pausing all shipments of oil through the Red Sea because of the threat of attacks. Meanwhile, shipping rates have soared, leading select shipping companies like Maersk to enjoy fortuitous share price rallies.
"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," Bailey said. "I think initially that will be an issue in the monetary policy world."
Though he welcomed the absence of a "prolongued spike" in oil prices, he also implied that could change quickly.
"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, likewise said "uncertainty" was a major threat, and encompassed the macroeconomic environment, geopolitical tensions, credit risks and unemployment.
"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, Bailey was asked about how UK households were faring in the current climate of higher interest rates, a line of questioning that led the Bank boss to recognise there are people in the UK living in "very difficult circumstances".
"We've now had quite a big change in market interest rates in recent months, so that the cost of mortgages is coming down," Bailey responded.
"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. 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."
By Anna Wise, PA Business Reporter
