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BoE’s Cunliffe says Russia crisis will add to risks from rates shift -Breaking

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William Schomberg

LONDON (Reuters), Deputy Governor Jon Cunliffe of the Bank of England said that Russia’s invasion of Ukraine could increase volatility in financial markets, which are already unstable due to a move to higher interest rates.

Cunliffe stated that the increased perception of geopolitical risk and its potential impact on growth and inflation can increase the risks surrounding the current adjustment away from more risky assets.

He said, “And this happens during a period with relatively low market liquidity,” in an address at Oxford Union Debating Society on Wednesday.

Cunliffe stated that the long-term economic and financial impact of Russia’s invasion was unclear, but that the current sanctions against Russia have not threatened the stability of its financial system, even though they could severely harm the Russian economy.

Since December, the BoE raised interest rates two times. This is the second time that a central bank has done so since the outbreak of the coronavirus pandemic. U.S. Federal Reserve indicated that it would also increase borrowing costs in this month.

This shift by central bankers to address an inflation spike, which has been caused by economic reopening caused sharp falls of the value share, which was further affected by Russia’s attack against its neighbor.

Cunliffe indicated that any unexpected jump in interest rate bets may trigger sharp moves out risky assets, while an increase in economic expectations might amplify the shift.

I am not saying the markets won’t be able to make necessary adjustments. He also said that there will be another “dash for money” which refers to panicked investors fleeing into safer assets at the beginning of the pandemic.

All of these, I believe, highlight my first lesson. Financial stability is ensuring that the financial system can withstand unexpected and severe shocks.

Cunliffe, in a follow-up question-and-answer session following the speech stated that while inflation was at 5.5% (its highest level in 30 years) it made it hard for Britons but did not suggest they worry about a return of the 1970s price-wage spiral.

He said, “The Bank of England is going to do all it takes to control inflation”

Silvana Terreyro from the BoE, another rate-setter said that Russia’s invasion would cause an increase in energy prices, which will affect British economic growth. This could also lead to short-term inflation.

Tenreyro stated that it was not too early to predict how the policymakers’ trade-off would turn out.

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