BoE publishes scenarios for the 2024 stress test

BoE has published the scenarios that will be used in its 2024 desk-based stress test. The exercise will test the resilience of the banking system (firms that account for c.75% of the sector’s lending to the UK real economy) to two hypothetical scenarios, which include severe but plausible combinations of adverse shocks to the UK and global economies:

• The supply shock scenario sees a severe, negative global aggregate supply shock from an increase in geopolitical tensions and global commodity prices and supply-chain disruptions. This leads to higher-than-expected inflation across advanced economies. High inflation is assumed to lead to expectations of higher inflation in the future and global policymakers increase interest rates to bring inflation back to target. In this scenario, Bank Rate rises to 9% and stays there for a year.
• The demand shock scenario sees a severe negative global aggregate demand shock and global recession, resulting in falling inflation. This prompts Bank Rate to fall rapidly from 5.25% to 0.1%, remaining below 0.5% for two years, to support the recovery and return inflation to target.

BoE will publish its findings by the end of 2024. This will be on an aggregate level rather than at the level of individual banks.