Summary
The Bank of England’s Financial Policy Committee (FPC) concluded that the conflict in the Middle East has triggered a substantial shock to the global economy, raising risks to financial stability through higher energy costs and intensified market volatility. The committee detailed energy price spikes, large shifts in government bond yields, hedge fund deleveraging, stress on mortgage markets, and strains in private credit and retail funds.
Energy and shipping disruption
The FPC pointed to disruptions in shipping through the Strait of Hormuz and reduced energy production in the Gulf region as proximate drivers of the shock. The committee reported that oil prices moved above $100 per barrel, with Brent crude reaching over 60% above pre-conflict levels. European and UK natural gas prices also increased sharply, jumping more than 70% relative to pre-conflict levels.
Market reactions and fixed income volatility
In response to the energy shock and broader market uncertainty, government bond yields rose markedly. The committee recorded that UK 10-year yields increased 74 basis points and 2-year yields climbed 100 basis points from pre-conflict levels. The FPC attributed part of the moves to deleveraging by hedge funds, concentrated largely at the short end of the yield curve.
Hedge funds reduced aggregate net gilt repo borrowing by 21%, or 19 billion, bringing the total down to 74 billion, though the committee noted this level remains elevated by historical standards.
Banking sector and capital stance
Despite recent declines in UK bank share prices, the FPC observed that share valuations are substantially higher than a year earlier, with the aggregate price to tangible book at 1.4 times. On the basis of its assessment, the committee kept the UK countercyclical capital buffer rate at 2%, concluding that the banking system retains capacity to support households and businesses even if conditions worsen considerably.
Mortgage market impact
The committee highlighted material changes in mortgage pricing and product availability. Average rates for two-year and five-year fixed-rate mortgages have risen by an estimated 80 basis points and 70 basis points respectively since the conflict began. Concurrently, the number of mortgage products available contracted from around 8,500 to 7,000.
Private credit and fund liquidity
Investor sentiment toward private credit had already deteriorated prior to the conflict, driven by concerns over asset quality, valuations and liquidity. Redemption requests were elevated across several international retail funds, and some firms imposed limits on redemptions.
Outlook and guidance
The FPC warned that the global environment is now materially more unpredictable as a consequence of the conflict, increasing the likelihood of large, frequent and potentially overlapping shocks. The committee stressed the importance of timely risk management by market participants and urged that stress tests incorporate scenarios featuring sudden and significant price adjustments.
The FPC s statements focused on observed market moves and prudential judgments rather than forecasting specific outcomes. Where information was limited in scope, the committee reflected those constraints in its assessment rather than drawing conclusions beyond the available evidence.