The Bank of England has warned that the ongoing conflict involving Iran could pose a serious threat to global financial stability, following what it described as a «substantial» shock to the world economy.
In its latest quarterly update, the central bank said the war has intensified existing risks across financial markets, particularly in private credit and bond sectors. Rising oil prices since the outbreak of the conflict have already driven sharp market movements, including higher government bond yields and widening credit spreads.
The Bank cautioned that the situation could weigh on economic growth, push inflation higher and lead to tighter financial conditions. It added that the global environment has become «materially more unpredictable,» increasing the likelihood of volatile and overlapping market shocks.
Particular concern was raised over the UK government bond market, where significant price swings and elevated borrowing costs have been observed. The Bank noted that concentrated positions held by hedge funds could amplify instability if markets shift suddenly.
The warning also extends to households, with the Bank estimating that around 5.2 mln UK borrowers, roughly three in five mortgage holders, could see their monthly repayments rise by the end of 2028. Mortgage rates have already climbed sharply, with average two-year fixed rates increasing by more than one percentage point since early March.
Private credit markets are also under pressure, with some funds facing increased withdrawal requests amid rising defaults and investor concerns. Meanwhile, the Bank flagged that high valuations in US technology stocks, particularly those linked to artificial intelligence, could face additional risks due to the energy demands of the sector.
Despite the challenging outlook, the Bank said UK businesses remain broadly resilient, though small and highly leveraged firms are more vulnerable to supply shocks linked to the conflict.
Overall, policymakers warned that heightened uncertainty could make markets more sensitive to new developments, raising the risk of sudden and severe financial disruptions.
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