BOE Sees Rising Eurozone Threat

        The Bank of England Tuesday warned that continued low growth and inflation in the eurozone carries risks for the U.K. economy and the stability of its financial system.
        In its twice-yearly Financial Stability Report, the BOE also said that while falling oil prices are good for global economic growth, they could "reinforce certain geopolitical risks" and may make it more difficult for U.S. shale oil and gas exploration firms to repay their debts.
        The BOE Tuesday announced the results of its stress testing of eight major U.K. banks, which examined their resilience in the face of a 35% drop in house prices and a sharp rise in interest rates. It found that only one would need to raise more capital.
        However, the BOE also expressed concerns about a possible reprise of 2011 and 2012, when concerns about the durability of the eurozone led to a sharp rise in funding costs for U.K. banks, and damaged consumer and business confidence.
        Policy makers said there could be negative consequences for the U.K. if investors lost faith in the ability of the European Central Bank and other eurozone institutions to "achieve the rebalancing and adjustments required in the euro area."
        "A further downward revision to growth and inflation prospects could lead investors to question again the sustainability of debt positions in the most vulnerable euro-area countries," it said.
        The eurozone's annual rate of inflation stood at 0.3% in November, while its economy grew by just 0.2% in the third quarter. Most economists expect inflation and economic growth rates to remain very low in 2015.
        The ECB has said it will review its monetary policy stance early next year, and indicated it may launch a program of government bond purchases in a further effort to boost growth and inflation. However, the ECB has made it clear that monetary policy alone won't be sufficient, and that governments will have to ease back on efforts to cut their budget deficits to raise investment spending, while also implementing reforms to labor and product markets.
        A rise in borrowing costs for "vulnerable" eurozone members would be "most likely to occur if there were doubts about the credibility and effectiveness of policy measures taken to restore growth and raise inflation," the BOE said.
        The BOE said that loss of confidence could lead to "a sharp rise in bank funding costs across Europe, as in 2011-12," but added that risk had been reduced by a broad improvement in the capital positions of European banks in the intervening years.
        The BOE said should there be a fresh intensification of the eurozone's crisis, the U.K. economy would be directly affected by a decline in exports, while fresh doubts about the integrity of the currency area could lead consumers and businesses to cut back on spending.
        But it said U.K. banks had cut back on their lending to the eurozone in the years since the height of the crisis in 2011 and 2012, while lending to U.K. borrowers by eurozone banks has also fallen.
        Write to Paul Hannon at paul.hannon@wsj.com
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        (END) Dow Jones Newswires

        December 16, 2014 02:20 ET (07:20 GMT)

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