MNI BRIEF: BOE Paper Shows Global Shocks Key To UK Outlook

Significant changes in UK financial conditions can be explained almost entirely by reference to global financial shocks and around half of the changes in UK GDP by non-financial shocks abroad, according to Bank of England research published Friday.

The research, in the latest Quarterly Bulletin, also backed up the work of Monetary Policy Committee member Silvana Tenreyro, that suggests trying to decrease vulnerability to events overseas by shortening supply chains is self-defeating, as it increases output volatility by raising exposure to domestic shocks without eliminating exposure to global shocks.

The BOE research found that on average over the 1997–2019 period, global shocks explained 52% of the variation in UK GDP and 90% of the variation in UK financial conditions. Current MPC members place a lot of weight on developments overseas, with Deputy Governor Ben Broadbent, for example, emphasising how UK sovereign debt price changes are driven by global risk shifts.