BoE’s Cunliffe: Sanctions To Do Severe Damage to Russia’s economy

Bank of England Deputy Governor for Financial Stability Jon Cunliffe said on Wednesday that sanctions will do severe damage to the Russian economy, but should not pose material risks to financial stability more broadly.

Cunliffe said that heightened perceptions of geopolitical risk and its potential impact on growth and inflation can only increase risks around adjustment away from riskier assets.

Britain’s Deputy Governor of the Bank of England Jon Cunliffe speaks during the Bank of England’s financial stability report at the Bank of England in the City of London

Cunliffe said the crisis triggered by Russia’s invasion of Ukraine would add to the risks already raised by a shift to higher interest rates which has led to sharp moves in 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.

“And this comes during a period of relatively low market liquidity,” he said in a speech at Oxford University on Wednesday.

Cunliffe said sanctions announced so far against Russia did not threaten the stability of the financial system although they would do severe damage to the Russian economy.

The BoE has raised interest rates twice since December, the first increases by a major central bank since the coronavirus pandemic swept the world economy. The U.S. Federal Reserve has signalled it will also raise borrowing costs this month.

The shift by central banks to tackle a jump in inflation, caused by the reopening of their economies, has caused a sharp fall in the value of riskier assets such as shares.

Cunliffe said any sudden jump in bets on future interest rate moves could trigger “sharp moves out of risky assets,” while a drop in expectations about the economic outlook could amplify the shift.

“I am not saying that markets will be unable to manage the necessary adjustments. Nor that we will experience another ‘dash for cash’,” he said, referring to a panicked flight into safe assets by investors at the start of the pandemic.

“But all of this, in my view, underlines my first lesson: that securing financial stability means ensuring the financial system has the resilience to withstand severe and unanticipated shocks, however generated”.