Andy Bruce, William Schomberg

LONDON, (Reuters) – Bank of England Governor Andrew Bailey stated that swings in the commodity markets following Russia’s invasion of Ukraine pose a threat to financial stability. The challenges facing the world economic system are greater than those faced after the financial crisis.

Oil, gas, metals, and agricultural market prices have skyrocketed and are so volatile that many companies have cut their trading volumes to maintain liquidity.

Bailey pointed out that the most vulnerable area in the financial system is the market for commodity products.

Bailey said that we cannot take resilience (especially in this part of the market) for granted at an event hosted by the Bruegel think-tank in Brussels Monday.

Bailey said that the impact of rising oil prices on real British incomes this year is likely to be more severe than it was in the 1970s when an oil crises contributed to the most serious bouts of inflation in British history.

Last week, the European Central Bank declared that it would be keeping a close watch on the commodities derivatives market due to increased price volatility.

An European energy trade group asked for financial liquidity in an emergency to support energy markets during extreme volatility.

Bailey stated, “I fear that the cost of doing business in these markets will reflect an enormous change in risk and volatility.”

“We must be very careful to make sure that any step in risk cost doesn’t lead to a market collapse.”

Bailey stated that these markets have a very big connection to monetary policies as central banks struggle with rising inflation due to an increase in energy prices.

He mostly stayed true to the discussion from the interest rate announcement this month, in which officials softened the language about the need for more rate increases after raising borrowing costs for the 3rd time since December.

Bailey indicated that evidence had begun to emerge from the BoE of an economic slowdown. Bailey stated, “We anticipate that this pressure will weigh down domestically generated inflation. Other things are equal at the present.”

Bailey answered a question about the possibility of a rate increase by the BoE during its May meeting. He said that the market was volatile following the invasion of Ukraine. This led to higher energy prices.

He said inflation risks were multi-faceted, which means it could be slower or faster than what the BoE forecast.

Bailey answered a question about whether a world with less globalization and fewer fragments would be possible if China allied itself with Russia. Bailey stated that the situation is more difficult than it was after the financial crisis of 2007-09.

“I believe it’s very important for authorities, government policymakers, and other officials to make sure that our commitment to an open economy is not abandoned.”