Leading economist Carolyn Wilkins has flagged the dangers of external threats to the UK financial system even as inflation remains “top of mind” for domestic households, businesses and policymakers.
Speaking during her first trip to Scotland since joining as an external member of the Bank of England’s financial policy committee, Ms Wilkins acknowledged that the cost of living crisis could spill over into the wider financial sector if a substantial proportion of individuals and firms find themselves unable to repay their debts. However, she added that household debt is in “better shape” now than in the run-up to the global banking crisis of 2007.
“So when you look at it from a financial stability point of view, it feels manageable,” Ms Wilkins said.
“Of course from the individual point of view, there may be people in some circumstances that find it difficult to adjust to the higher cost of living or any kind of instability in their income because they’re just so highly levered, but that doesn’t seem to be as big an issues as it was before.”
READ MORE: UK Inflation: rate soars to 40-year high 9 per cent after hike in energy prices
Some small UK businesses that have managed to hang on through the pandemic are likewise struggling, she said, but there are also other areas of vulnerability in the global financial system such as the US, where the amount of corporate debt trading at distressed levels has doubled since the start of the year.
“When you think about whether [British business debts] will cause stresses to the UK economy or the UK financial system more widely, it doesn’t seem to be that big of an issue,” Ms Wilkins said.
“That being said, if you look at global indebtedness, there are some concerns that if there were a global downturn, that could create some negative headwinds for the UK economy.”
Ms Wilkins was appointed to the financial policy committee in June of last year, having previously served as Senior Deputy Governor of the Bank of Canada. With a special interest in crypto assets and currencies, she represented Canada on the Basel Committee on Banking Supervision and co-chaired its working group on liquidity.
The BoE is currently predicting that inflation will begin to ease off heading into 2023 after a further expected spike in October, when the next round of increases to the energy price cap are set to take effect. While the bank’s financial policy committee is responsible for maintaining financial stability, rather than monetary policy, all eyes remain on increasing prices.
READ MORE: Chancellor needs to be ‘clever’ to help UK through cost-of-living crisis
“I would say that the cost of living is top of mind for central banks, not just the Bank of England but central banks around the world,” Ms Wilkins said.
“It’s also top of mind for households and businesses. It was the number one issue that was raised in Edinburgh and Glasgow over the last two days, and certainly it is the commitment of the Bank of England to address that issue over time.”
She added: “It is very relevant what happens to the economy at large because certainly all of that flows through the financial system. Our job is to ensure that financial institutions remain safe and are there to provide financial services that families and businesses need.”
Noting that supply chain issues are the main driver of the current inflationary spiral, Ms Wilkins said hefty investment is required to develop longer-term solutions. Some of the most important remedies – the need for digitalisation, better education and improved productivity – are not within the power of central bankers, she added.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereLast Updated:
Report this comment Cancel