The risk of a ‘sharp market correction’ has increased: Bank of England
Risks associated with geopolitical tensions, global fragmentation of trade and financial markets, and pressures on sovereign debt markets remain elevated. As a result, the risk of a sharp market correction has increased.
This is according to the Bank of England’s Financial Policy Committee which published the findings of its latest meeting on Wednesday (8 October).
“A crystallisation of such global risks could have a material impact on the UK as an open economy and global financial centre. Despite persistent material uncertainty around the global macroeconomic outlook, risky asset valuations have increased and credit spreads have compressed, the committee said.
It added that measures of risk premia across many risky asset classes have tightened further since the last FPC meeting in June 2025.
“On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence (AI). This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic.”
Uncertainty around the global risk environment increases the risk that markets have not fully priced in possible adverse outcomes, and a sudden correction could occur should any of these risks crystallise, the committee said.
“A sharp correction could interact with vulnerabilities in the system of market-based finance, adversely affecting the cost and availability of finance for households and businesses. As an open economy with a global financial centre, the risk of spillovers to the UK financial system from such global shocks is material.”
Domestically, the Committee judged that UK households and corporates have remained resilient but face continued pressure from higher costs of living and the continued adjustment to higher borrowing costs.
It also maintains its judgement that the UK banking system has the capacity to support households and businesses even if economic and financial conditions were to be substantially worse than expected.
