The Bank of England on Tuesday warned that economic risks from the Middle East conflict could amplify vulnerabilities in financial markets amid a fragile US-Iran deal to end the war.
“The signing of the Memorandum of Understanding between the US and Iran has led energy prices to fall back to just above pre-conflict levels, reducing near-term risks,” the BoE said in its latest financial stability report.
The central bank’s Financial Policy Committee warned, however, that uncertainties remain, particularly if the economic fallout from the conflict compounds with other risks, such as a potential AI bubble.
Valuations of companies linked to artificial intelligence have become more stretched and rely on continued strong profit growth in the coming years.
This in turn depends upon the successful build-out and of infrastructure and wide-spread adoption of the technology.
Against this backdrop, “persistent vulnerabilities in the financial system… could interact with further developments in the Middle East”, the committee said.
As a net energy importer, the UK has been particularly exposed to the surge in prices linked to the war.
The British financial system has, however, remained “resilient” in the face of these risks, it added.
The BoE also proposed easing rules around the safety buffer requirements for major British banks such as NatWest and Lloyds, introduced after the financial crisis to allow lenders to draw on funds more easily in times of stress.
