Bank of England
Monetary and financial stability and the invasion of Ukraine
Jon Cunliffe

Ukraine´s war impact in the UK economy and financial system

In this speech Jon Cunliffe, Bank of England´s Deputy Governor for Financial Stability talks about the impact that the Russian invasion of Ukraine has had on the UK economy and on UK financial stability. He reviews what implications this could have on monetary policy and gives an assessment on the resilience of the UK financial system.

Key findings from the speech:

  • The UK labour market before the war: The domestic labour market has also been buffeted by large changes in supply and demand from the pandemic or Brexit. UK began the year 2022 with a record 1.3 million vacancies and an increasingly tight labour market.

  • The Monetary Policy Committee’s February 2022 forecast: Inflation was forecast to peak at over 7% in the second quarter of the year, driven mainly by a gas and electricity price increase. The labour market was forecast to remain tight in the near term with unemployment continuing to fall until the mid-2022 and pay continuing to grow above 4% annually until this autumn.

  • The impact of Russia’s invasion of Ukraine:  Russia accounts for a much larger share of global commodity supply. Ukraine is also a major supplier of agricultural commodities. Global oil prices have increased by 11% and UK wholesale gas prices have increased by 40% since the invasion. In March, UK consumer confidence fell to its lowest level since November 2020.

  • Monetary policy implications: The aim of the central bank is ensuring that inflationary pressures do not become embedded in the domestic economy. The risk here is that to enter a period of even higher inflation – higher than we have seen for 40 years – with a tight labour market and strong pay growth.

  • Financial stability: 

- The UK banking system has emerged from the Covid pandemic so far in a strong position.

- Subsequent fiscal support to the economy meant that the banking system did not need to call on the buffers of capital and liquidity that had been built up.

- The UK banking system exposure to Russia and Ukraine is small.

- The impacts on the UK banking system are more likely to come, through the general impact of higher inflation and lower economic activity on banks’ balance sheets.

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