Le Pen threatens Britain’s economy, Bank of England warns

Markets fear Marine Le Pen's National Rally could drive up French debt - Christian Hartmann/Reuters

The looming French election poses a threat to global financial stability and the British economy, the Bank of England has warned.

Officials at Threadneedle Street warned of potential market turmoil after president Emmanuel Macron called a snap poll that could hand a majority to Marine Le Pen’s anti-migration National Rally party.

Ms Le Pen favours increased borrowing, meaning a victory would risk driving up France’s already high debt levels.

The report focuses on worst-case scenarios, and markets may not react as violently as some analysts fear. Bank of England officials did not refer to Ms Le Pen directly, and stressed that there are risks across much of the world in a year of widespread general elections.

They said: “Public debt to GDP levels have increased across a number of major economies, which could have consequences for UK financial stability.”

If bond investors flee a nation such as France, it threatens to send shockwaves through wider financial markets, forcing up borrowing costs just as heavily indebted companies and households need to refinance their loans and mortgages.

In its June Financial Stability Report, the Bank said: “High public debt levels in major economies could have consequences for UK financial stability and interact with other risks.

“A deterioration in market perceptions of the path of public debt globally could lead to market volatility and interact with vulnerabilities in market-based finance, potentially tightening credit conditions for households and businesses.”

The Bank’s Financial Policy Committee, headed by Andrew Bailey, the Governor, particularly singled out France.

It said: “Policy uncertainty could increase existing sovereign debt pressures and interact with pressures on public sector debt levels in major economies, geopolitical risks and risks associated with global fragmentation.

“These factors and their potential interaction make the economic outlook less certain and could lead to market volatility, including in sovereign debt markets, as already observed in response to the unexpected news of the French parliamentary elections over the summer.”

The Bank said that Britain’s financial system appeared well prepared to handle any shocks, but warned there were growing risks in other parts of the financial system.

This included US stock markets, where prices have reached levels last hit just before the dotcom bubble burst, and the private equity industry, which has been an increasingly important source of funding for British businesses. Either could be hit hard by a shock to financial markets.

Private equity-backed companies account for 10pc of all employment in the UK – more than 2m people – and the industry has grown from $2 trillion (£1.6 trillion) of assets under management to $8 trillion over the past decade.

But the Bank said that despite this growth, the sector’s finances often appeared opaque with multiple levels of debt, making the industry and the businesses it runs vulnerable to higher borrowing costs.

The Financial Stability Report said: “The widespread use of leverage within private equity firms and their portfolio companies makes them particularly exposed to tighter financing conditions.”

There are also concerns in the housing market.

Around 3m British households are still on low-rate mortgages of below 3pc, many of which were fixed before interest rates surged. Almost all of those will move on to higher rates by the end of 2026, and can typically expect to pay an extra £180 per month each.

However, as the Bank of England is expected to start cutting interest rates in the coming months, the 18pc of borrowers with floating rate loans will start to feel the benefit.

Officials expect around 1.5m such households to see a cut to their rates this year, rising to almost two million by the end of 2026.

Debt interest burdens are rising, but are well below levels seen in crises of previous decades.

The average household can expect to pay more than 8pc of its income on mortgage repayments, up from a low of around 6pc in the pandemic. However this lower than the more than 10pc paid in the financial crisis, or the roughly 9pc suffered in the early 1990s.

Just over 1pc of all mortgaged owner-occupiers are in arrears and the figure is set to increase further. But this is also still below the past peaks of 4pc in the 1990s and 2.4pc in the financial crisis, despite the sharp rise in the Bank’s base rate from 0.1pc in late 2021 to 5.25pc last year.

Most of those mortgages in arrears were given out before the financial crisis, after which extra affordability rules were introduced.

Although mortgage borrowers appear to be resilient to higher borrowing costs, poorer households are still struggling financially.

“Savings buffers for renters and low-income households have been further eroded,” the Bank said, with surveys indicating savings will fall further over the year.

Around one renter in every six is behind on their monthly payments, with average rents up almost 9pc in the past year.

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