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Bank of England Warns of Overvaluation Risks in U.S. Tech Stocks and Dollar-Denominated Bonds

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The Bank of England (BoE) has expressed concerns over the valuations of certain financial assets, particularly U.S. tech stocks and dollar-denominated corporate bonds, stating that they may be too high. The BoE’s Financial Policy Committee (FPC) made this statement following a quarterly meeting, highlighting the challenging risk environment and subdued growth prospects in the near term.

The FPC acknowledged that the overall resilience of Britain’s banks and financial system remained intact. As a result, it decided to keep the banks’ counter-cyclical capital buffer (CCyB) – a risk management tool – unchanged at 2%. However, the FPC emphasized that it would closely monitor developments and be prepared to adjust the CCyB rate in response to evolving economic and financial conditions.

During the meeting, some FPC members argued for an increase in the rate to enhance banks’ resilience, given the low level of loan losses. The possibility of reducing the rate was also considered, according to the BoE.

In its latest forecasts, the International Monetary Fund (IMF) downgraded its growth projections for Britain in 2024. The IMF now predicts a growth rate of just 0.6%, the weakest among major advanced economies.

Despite the impact of recent rate rises, the BoE assured that it did not expect the debt-servicing burden on British households or businesses to reach the levels seen before the global financial crisis in 2007.

However, the central bank is closely monitoring the property market in Hong Kong and mainland China, as some British lenders have exposure to these regions. It also noted that higher mortgage rates were leading to landlords passing on costs to tenants, but there have not been significant signs of landlords selling properties thus far.

The decision to keep interest rates on hold was made in the BoE’s recent meeting of its Monetary Policy Committee (MPC). It was the first time rates were not increased since the tightening cycle began in December 2021, leaving the main Bank Rate at 5.25%.

The BoE’s cautionary statements reflect a broader concern about the global economic outlook, particularly in relation to trade tensions and geopolitical uncertainties. As the BoE continues to closely monitor the situation, it aims to strike a balance between supporting economic growth and managing potential risks to the financial system.

Overall, the BoE’s assessment highlights the need for careful monitoring and risk management in the face of uncertain economic conditions. It underscores the importance of maintaining a resilient financial system while navigating evolving challenges in the global market.

More detail via Kitco.com here… ( Image via Kitco.com )

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