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The governor of the Bank of England has warned there are “substantial risks” of spillovers to UK financial markets from Donald Trump’s attacks on the independence of the Federal Reserve and his threat to annex Greenland.
Andrew Bailey told an influential committee of MPs on Tuesday that BoE officials “worry considerably” about how financial markets will react to rising geopolitical tensions and what impact this will have on the UK financial system.
“The level of geopolitical uncertainty and the level of geopolitical issues is obviously a big consideration because they can have financial stability consequences,” Bailey said in response to a question about US political risks and Trump’s threat to seize Greenland.
Wall Street stocks fell on Tuesday, and the US dollar slid. European equities also fell, with the Stoxx Europe 600 index closing 0.7 per cent lower. The FTSE 100 index also dropped 0.7 per cent.
Trump said on Tuesday he would hold a meeting at the World Economic Forum in Davos with “various” interested parties over the Greenland crisis, adding “there can be no going back” on his plan to seize the vast Arctic island.
The US president has threatened to hit European countries with 10 per cent tariffs unless they agree to support him acquiring Greenland, intensifying fears of a trade war and throwing the future of Nato into doubt.
“It is the case that we worry considerably about how markets can react to these things,” Bailey told the House of Commons Treasury select committee. While the response had so far been “more muted than we would have feared”, this was not “a source of any assurance” and the BoE would “remain alert” to these risks.
The BoE governor also said that although many of the geopolitical tensions were stemming from the US, they could still have serious implications for the UK financial system.
“There is very substantial scope for spillover,” he said. “There are substantial externalities and potential spillovers from things that go on in the US and particularly, I would say, from a threat to the independence of the Federal Reserve.”
Bailey and 10 other central bank governors last week issued a statement saying they “stand in full solidarity with the Federal Reserve System and its chair Jerome H Powell”, after US authorities opened a criminal investigation into the Fed chair.
Describing this move as “pretty unprecedented”, Bailey said it was “a point we have to make” given the importance of the Fed and the US dollar to the global economy and financial system, adding that Powell was “a man of utmost integrity”.