Further “global shocks” pose a major threat to the UK economy, the Bank of England governor said, as he told MPs he was monitoring the situation in the Red Sea closely amid concerns about oil supplies.
Andrew Bailey also said he hoped mortgage costs would continue to fall after the bank paused interest rate hikes.
Speaking to a group of MPs during a Treasury Committee session, the bank’s boss said he believed it was clear there was “the potential for further global shocks” when asked about the biggest threat facing the UK economy this year.
He said that the bank is closely monitoring the situation in the Red Sea.
This comes after attacks by Iran-backed Houthi rebels on cargo ships on the vital trade route through the Suez Canal, causing some ships to be forced to change course due to safety concerns.
Oil giant BP said last month it had temporarily halted all oil shipments through the Red Sea due to the threat of attacks.
“We have certainly seen – as best we can tell through observation – that freight traffic is being affected and being rerouted,” Mr Bailey said. “That will drive up freight rates and freight costs.”
“I think initially that will be a problem in the monetary policy world.”
Fortunately, he said, there was no “long-term spike” in oil prices as a result.
“We have to monitor this very carefully, because it is clearly having an impact,” he told the committee.
Sarah Breeden, the bank’s deputy governor for financial stability, said “uncertainty” represents a major threat, as do the macroeconomic environment, geopolitical tensions, credit risks and unemployment.
She told MPs: “The risk environment at the moment looks particularly challenging… I think the set of circumstances we currently face is extraordinary.”
Elsewhere in the session, Bailey was asked how British households are faring in the current climate of rising interest rates.
“We have now seen a significant change in market interest rates in recent months, such that the cost of mortgages has come down,” the governor said.
“Let’s look at the market at the moment – this is clearly fueling mortgage costs, and I hope that continues.”
He added: “I think the rental market is more stretched because you have a higher percentage of low-income families in the rental market.
“Rent inflation is currently around 6%… I really hope that rate comes down and obviously lower interest rates are helping with that as well.”
Mr Bailey stressed that individual circumstances will be different and that the bank recognizes that there are people in the UK experiencing “very difficult circumstances” amid rising costs of living.