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George Osborne warns City to prepare for turmoil over Russia sanctions and interest rate rises
Chancellor says action on Ukraine could have a significant impact on City of London
George Osborne Russia's annexation of Crimea was "unacceptable" and the Treasury had begun an assessment of possible sanctions on Russia and their economic impact Photo: Bloomberg
By Szu Ping Chan, in Washington
6:00PM BST 11 Apr 2014
522 Comments
The City must brace itself for a new wave of market volatility amid looming interest rate rises and the possibility of harsher Russian sanctions, the Chancellor has said, as he insisted that the Treasury was prepared "for any eventuality" on the Ukrainian crisis.
George Osborne said the gradual tapering of US asset purchases, which triggered a major emerging market sell-off last year, showed it was important that policymakers provided clear communication to the market about future policy actions.
"We all need to be ready for an increased level of volatility in line with historic trends," Mr Osborne said on Friday.
"It is something we need to be communicating more so that it is priced in and people expect this return of normal volatility and it's not a surprise when it happens."
Mr Osborne said turmoil in markets could be exacerbated by differing rates of recovery, especially if the European Central Bank decided to loosen policy further with negative interest rates or its own quantitative easing programme.
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Speaking on the side lines of the International Monetary Fund (IMF) Spring Meeting in Washington, Mr Osborne said geo-political risks stemming from Ukraine would form a main talking point in meetings with G7 and G20 ministers this weekend, alongside IMF quota reform and the outlook for the global economy.
He said Russia's annexation of Crimea was "unacceptable" and the Treasury had begun an assessment of possible sanctions on Russia and their economic impact. The Government would be "ready for any eventuality", he said, even if there was a significant impact on the City of London.
"The UK is prepared to take actions that will have an impact on Russian engagement with our financial services ... we are prepared to bear the economic price [of this], because the economic price of doing nothing is considerably higher," he said. "It's a price that we’re willing to pay if it enforces the international rule of law."
He also said the Treasury plans had received "strong support from the leading players in the City".
"The City of London is a global financial centre and that is an asset in the UK, but that doesn't mean that its interests will come above the national security interests of our country," he added.
Mr Osborne's warning about more market volatility comes after he announced steps in the Budget to enhance Britain's resilience to economic shocks, including building up the country's foreign exchange reserves.
IMF research this week also highlighted the growing interconnectedness of global economies. Using historic data, it calculated that a one percentage point rise in US 10-year borrowing costs roughly translated into an 0.66 percentage point rise in equivalent UK borrowing costs.
More recent rises in bond yields showed a higher correlation, the IMF research showed, suggesting that policy action in the US is likely to affect the UK, even if Britain's policy stance remains unchanged.
Chancellor says action on Ukraine could have a significant impact on City of London
George Osborne Russia's annexation of Crimea was "unacceptable" and the Treasury had begun an assessment of possible sanctions on Russia and their economic impact Photo: Bloomberg By Szu Ping Chan, in Washington
6:00PM BST 11 Apr 2014
522 Comments The City must brace itself for a new wave of market volatility amid looming interest rate rises and the possibility of harsher Russian sanctions, the Chancellor has said, as he insisted that the Treasury was prepared "for any eventuality" on the Ukrainian crisis.
George Osborne said the gradual tapering of US asset purchases, which triggered a major emerging market sell-off last year, showed it was important that policymakers provided clear communication to the market about future policy actions.
"We all need to be ready for an increased level of volatility in line with historic trends," Mr Osborne said on Friday.
"It is something we need to be communicating more so that it is priced in and people expect this return of normal volatility and it's not a surprise when it happens."
Mr Osborne said turmoil in markets could be exacerbated by differing rates of recovery, especially if the European Central Bank decided to loosen policy further with negative interest rates or its own quantitative easing programme.
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Speaking on the side lines of the International Monetary Fund (IMF) Spring Meeting in Washington, Mr Osborne said geo-political risks stemming from Ukraine would form a main talking point in meetings with G7 and G20 ministers this weekend, alongside IMF quota reform and the outlook for the global economy.
He said Russia's annexation of Crimea was "unacceptable" and the Treasury had begun an assessment of possible sanctions on Russia and their economic impact. The Government would be "ready for any eventuality", he said, even if there was a significant impact on the City of London.
"The UK is prepared to take actions that will have an impact on Russian engagement with our financial services ... we are prepared to bear the economic price [of this], because the economic price of doing nothing is considerably higher," he said. "It's a price that we’re willing to pay if it enforces the international rule of law."
He also said the Treasury plans had received "strong support from the leading players in the City".
"The City of London is a global financial centre and that is an asset in the UK, but that doesn't mean that its interests will come above the national security interests of our country," he added.
Mr Osborne's warning about more market volatility comes after he announced steps in the Budget to enhance Britain's resilience to economic shocks, including building up the country's foreign exchange reserves.
IMF research this week also highlighted the growing interconnectedness of global economies. Using historic data, it calculated that a one percentage point rise in US 10-year borrowing costs roughly translated into an 0.66 percentage point rise in equivalent UK borrowing costs.
More recent rises in bond yields showed a higher correlation, the IMF research showed, suggesting that policy action in the US is likely to affect the UK, even if Britain's policy stance remains unchanged.
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