Bank of England Governor Andrew Bailey issued a stark warning to Parliament on Tuesday, stating that simmering geopolitical tensions pose significant financial stability risks and could trigger an abrupt market repricing with global consequences. Bailey highlighted specific concerns, including escalating trade disputes, threats to Federal Reserve independence, and former President Donald Trump's rhetoric regarding Greenland.
The BoE chief expressed "considerable" concern about how quickly markets could reprice if these tensions flare. He underscored the potential spillovers to the UK economy if political volatility in Washington undermines the Fed's autonomy, emphasizing that dollar dominance means American political instability has global ramifications. Bailey's comments included an extraordinary public defense of Fed Chair Jerome Powell, signaling deep concern among central bankers.
Concurrently, at the World Economic Forum in Davos, French President Emmanuel Macron delivered a blistering indictment of the collapsing international order, warning of a shift toward "a world without rules." His remarks were widely seen as aimed at Trump, who also spoke at the event. Trump confirmed a new tariff framework with Switzerland but attached an ominous caveat, stating rates could climb back up if Bern doesn't cooperate, exemplifying the policy unpredictability central bankers fear.
Market reactions were muted but tense. The FTSE 100 remained essentially flat, struggling between pockets of strong corporate earnings and escalating geopolitical anxiety. Banking and industrial stocks declined, while mining stocks like Rio Tinto benefited from safe-haven demand. The outlook was further complicated by UK inflation data, which unexpectedly accelerated to 3.4% in December, clouding the Bank of England's policy path.
