By Paul Hannon


The Bank of England on Wednesday warned that investors may be too complacent about the challenges facing the global economy, with the result that there is an increased risk of a "sharp correction" in asset prices.

In its latest, quarterly report on the threats to financial stability, the BOE highlighted problems in commercial real estate globally, China's property sector in particular, and rising levels of government debt as potential "vulnerabilities." It also said investors are underestimating the possibility that economic growth will disappoint, or that interest rates will have to stay high to tame inflation.

It said despite those and other threats to stability, asset prices have risen across a range of markets and investors are demanding less compensation for the risks they face than they have previously. It noted that "U.S. equity risk premia remain particularly low."

"The risk of a sharp correction in a broad range of asset prices and a widening in credit spreads has grown," the BOE's Financial Policy Committee said in a statement.

The BOE said prices of commercial real estate could decline further despite having already "fallen sharply," while "significant downside risks" remain in China's property market. It also warned that "a deterioration in market perceptions of the path for public debt" could lead to falls in some asset prices, and raise borrowing costs for households and businesses.

The FPC said the private-equity market could be "particularly vulnerable" should investors become more reluctant to take risks.

"Higher interest rates have made it more difficult for private equity funds to raise investment, contributing to downward pressure on asset valuations and default rates...have increased," the FPC said.

However, the FPC continues to view the U.K. banking system as well capitalized, and left the countercyclical capital buffer unchanged at 2%. It now expects U.K. households to be less pressured this year than it had previously anticipated, thanks to rising real incomes and easing mortgage rates. It now sees servicing of mortgages accounting for 8.4% of incomes by the end of 2026, having previously expected an increase to 8.8% from 7% in the third quarter of last year.


Write to Paul Hannon at paul.hannon@wsj.com


(END) Dow Jones Newswires

03-27-24 0651ET