The Bank of England’s Financial Policy Committee has published its 2026 Report assessing how macroeconomic conditions have been affecting the UK’s financial system from both domestic and international pressures.
Since the last report was published in December 2025, uncertainty has only grown over the intensifying conflict in the Middle East around the Strait of Hormuz and Iran as well as the historically unprecedented levels of frontier AI growth across all sectors.
Continued conflicts in the Middle East influence global shipping routes and energy costs
- Despite the signing of the Memorandum of Understanding between the US and Iran in June which agreed to restore traffic through the Strait of Hormuz for 30 days, deals for a ceasefire have since collapsed, resulting in the Strait’s subsequent reclosure.
- The volatile nature of the Strait and damage to key oil infrastructure in the Middle East has caused oil and gas prices to rise substantially, though not to the level during the 2022 Russian – Ukrainian conflict.
- Re-escalation will cause limited scope of for previously used mitigating measures through the coordinated release of strategic oil reserves by members of the International Energy Agency.
Frontier AI continues to make waves whilst requiring businesses to level up their security
- Progress in AI models has been faster than expected, leading to historically unparalleled levels of growth and benefits for the wider business community. However, the transformation to wider adoption – alongside the investment required to bring in the supporting infrastructure – comes with significant financial security risks.
- The AI ecosystem is also rapidly adopting external debt financing to support its accelerated infrastructure investment as the sector matures, which could pose a threat to long-term stability of the system as the scale of debt financing rises. (pg. 25)
The report also notes:
“This [AI’s] pace of investment is unprecedented historically. As of yet, there is little evidence that AI activity in these markets is crowding out the ability of other businesses or governments to access funding markets.” (pg. 7)
The resilience of market-based finance
Past stress test instances have shown that the UK system will be able to withstand a significant energy shock, although both household and commercial indebtedness levels are expected to rise with increasing energy prices and borrowing costs.
