The International Monetary Fund (IMF) has cautioned that global financial stability risks have increased significantly since their last report, driven largely by heightened uncertainty around trade policy and other geopolitical factors. In its semi-annual Global Financial Stability Report, the IMF cautioned tightening financial conditions, coupled with heightened uncertainty, is driving up financial risks worldwide. Specifically, the IMF warned that turmoil caused by President Trump’s tariffs could weigh heavily on banks as a trade shock could force banks to increase loss provisions (against potential loan defaults) or reduce non-interest income (if there is a slowdown in capital markets) or disrupt trade finance. The IMF has downgraded its 2025 UK growth forecast to 1.1% from 1.6% in January, matching their overall downgrade for advanced economies.
The BoE Monetary Policy Committee (MPC) at its May meeting has cut Bank Rate by 25 basis points to 4.25%. The MPC has cut Bank Rate by 100 basis points since kicking off its easing cycle in August 2024 and is expected to make further cuts to end the year at 3.75%. Meanwhile interest rate futures have priced in around 75 basis points more in reductions, ending the year at 3.50%. According to the latest monthly Reuters poll of economists, global trade tensions sparked by President Trump’s tariffs have hurt UK business sentiment and will slow economic growth. However, the consensus view remains unchanged at one Bank of England interest rate cut per quarter during 2025.
The UK’s Financial Conduct Authority (FCA) is seeking feedback on a potential overhaul of mortgage issuance and advice rules with a view to simplifying responsible lending guidance and stimulating demand in the £235.0 billion mortgage market. The regulator is seeking to make it easier, faster and cheaper for borrowers to make changes to their mortgage. The regulator has already reminded firms of the flexibility in its rules to help people access a mortgage and it plans to follow this work with a further public discussion on the future of the mortgage market in June. That study is expected to include: consideration of risk appetite and responsible risk-taking; alternative affordability testing; product innovation; lending in later life; and consumer information needs.
Bosses from some major UK banks have said in a letter to the UK Treasury that the bank ring-fencing regime should be scrapped to support the UK economy. In a letter sent to the Chancellor, Rachel Reeves, the chief executives said bank ring-fencing – which separates consumer lending operations from more volatile investment banking – is not only a drag on banks’ ability to support business and the economy but is now redundant. However, BoE Governor, Andrew Bailey, warned in February that the costs of that global financial crisis should not be forgotten in the backlash against the burden of financial regulation, saying there cannot be any trade-off between economic growth and financial stability.
UK Government data shows that just under 50% of SME loan applications are approved by banks, down from 67% in 2018. UK ministers have held a high-level meeting with leading bank executives as pressure mounts on lenders to improve access to credit for small businesses, amid growing fears that the UK’s economic recovery could be held back by under-investment in the small and medium-sized enterprises (SME) sector. Representatives of the banking industry argue that they are willing to lend more but that higher SME risk profiles make this difficult. They are calling for an expansion of the British Business Bank’s loan guarantee scheme which currently underwrites 70% of qualifying loans. Trade group, UK Finance, has pushed for more UK Government funding to support this guarantee, saying it is the only way to safely scale up SME lending.
During the Month, Fitch raised the outlook for China Construction Bank Corporation to “Stable” as part of a general rating action on six Chinese banks to reflect agency expectations that the likelihood of extraordinary Chinese Government support being available to these banks will remain unchanged (despite the recent downgrade of the China sovereign rating) as they play an integral role in implementing Chinese Government initiatives. Meanwhile Moody’s upgraded the long-term credit ratings of Swedbank AB with a “Stable” outlook to reflect its consistent work to repair and address its past anti-money laundering (AML) prevention weaknesses while prudently managing its capital buffers and maintaining its very strong credit quality and solid capitalisation despite the macro-related uncertainties.