Ukraine War Will Upend U.K. Economic Outlook, Two BOE Policy Makers Say

(Bloomberg) -- Two Bank of England policy makers warned that the fallout from the attack on Ukraine will upend the outlook for the U.K. economy, which had started to recover from the coronavirus pandemic.

Deputy Governor Jon Cunliffe said the war may hurt growth, spurring a drop in the value of the most risky assets and raising the level of uncertainty. Policy maker Silvana Tenreyro said she expects “upside surprises on inflation,” which will deliver a shock to the terms of trade.

“The events of the last few days have led to an abrupt shift in our expectations of the future and an increase in uncertainty,” Cunliffe said in a speech on Wednesday at Oxford University.

The remarks, which may be some of the last from the BOE before its decision on interest rates on March 17, underscore growing risks to the U.K. economy. Inflation in the U.K. has surged to a 30-year high and is forecast to reach 7.25% in April, more than triple the BOE's 2% target.

Policy makers have lifted borrowing costs twice since December and are widely expected to act again this month.

Cunliffe said that so far the war and sanctions on Russia are not threatening the stability of the global financial system, although they will hit Russia hard and upend financial markets.

“The heightened perception of geopolitical risks, and the potential impacts on growth and inflation, can only increase risks around the adjustment away from riskier assets that is already underway,” Cunliffe said.

Traders have rowed back on expectations for rate hikes since the invasion, including ruling out the chance of a half-point rate rise in the one of the next two meetings. They now expect the benchmark rate to rise to around 1.5% by the end of the year, from about 2% last month.

Tenreyro, the most dovish member of the nine-person Monetary Policy Committee, said she was surprised by the strength of wage growth indicated by a survey conducted by BOE agents. She said policy makers stand ready to act on inflation if needed.

Cunliffe said, “Russia is a relatively small part of the world economy, accounting for around 2% of world GDP. It accounts however for a much larger share of the world supply of energy and other commodities.”