Bank of England warns of economic vulnerabilities

The Bank of England has issued a stark warning that the UK economy is increasingly vulnerable to global risks, as the country faces the ripple effects of newly imposed US tariffs and ongoing international uncertainty.

In its latest Financial Policy Committee (FPC) report, the Bank highlighted that the UK is particularly exposed to shocks in the global economy with financial stability potentially threatened by weakening trade relations, higher public debt, and volatility in international markets.

The warning comes in the wake of US President Donald Trump’s introduction of a fresh wave of tariffs on European goods, a move that has rattled financial markets and raised fears of a return to trade wars reminiscent of the late 2010s.

For the UK, which is navigating its post-Brexit trade environment, these tariffs could deal a significant blow to exports and economic growth, just as the government aims to boost international trade ties.

"The combination of global trade tensions and tighter financial conditions presents a real risk to the UK economy," the Bank of England stated. "If these pressures persist, we could see reduced access to finance, declining investor confidence, and higher borrowing costs for businesses and households."

The Bank of England also raised concerns about the UK’s growing public debt, particularly in light of rising government spending commitments and slower-than-expected growth projections.

In a worst-case scenario, the Bank warned of the potential for a sharp rise in government bond yields, the cost of government borrowing which could be exacerbated if international investors lose confidence in the UK’s economic outlook.

Higher yields would not only increase the cost of debt repayments for the government but could also feed through to higher interest rates for consumers and businesses.

Despite these warning signs, the Bank expressed confidence in the strength of the UK’s banking sector, which it said remains well-capitalised and able to support households and firms through any downturn.

As a result, the FPC voted unanimously to maintain its countercyclical capital buffer at 2%, effectively signalling that banks should continue to lend and support the economy during periods of stress. However, the Bank made clear that it would continue to closely monitor financial conditions and stands ready to adjust policy if risks escalate.

The warning piles further pressure on Prime Minister Keir Starmer’s government, which is already grappling with slowing growth forecasts, a widening budget deficit, and the political fallout of the US tariffs.

Chancellor Rachel Reeves recently revised the UK’s 2025 GDP growth forecast down to just 1%, citing the impact of global uncertainty and external shocks. To bridge a projected £14 billion fiscal gap, the government has proposed a mix of welfare cuts, anti-tax avoidance measures, and spending reductions — policies that have drawn criticism from opposition parties and poverty campaigners.