The economic outlook for the UK and the rest of the world has "deteriorated materially", the Bank of England (BoE) has warned.
Energy and fuel costs are rising rapidly around the planet, pushing up prices in general more quickly.
However, UK banks are in a position to weather even a severe economic downturn, the BoE said.
It told banks to keep more money in rainy day funds to ensure they can weather any storm.
The BBC reports that the BoE's comments came in its latest financial stability study.
International forecasters such as the IMF and OECD have said Britain is more susceptible to recession and persistently high inflation than other Western countries, all of which are grappling with energy and commodity market shocks.
Meanwhile, a sell-off swept through markets yesterday as mounting convictions of an imminent global recession sparked a flight to safety and a dash to dump anything linked to growth.
Many stock exchanges, as well as oil and metal prices, fell sharply, while the euro sunk to its lowest level against the dollar in two decades and sterling suffered heavy losses.
Even gold drops
The Telegraph says that even the price of gold dropped 1.8%, with investors instead rushing to buy Treasuries and the dollar. The yield on 10-year US Government debt dropped below 3% - a sign of investor appetite for safe-haven assets.
The pound fell by as much as 1.4% to $1.193 - its lowest level since the outbreak of the pandemic in March 2020.
In the US, the yield curve - the difference in yields between long-term and short-term government debt - inverted, a sign that investors are worried about an imminent recession in the world's biggest economy.
The FTSE 100 crashed by more than 2.8% to 7,025, wiping around £50billion off the UK's biggest companies as turmoil spread through markets.
Energy and commodity stocks were among the worst hit.
The BoE is widely expected to raise interest rates yet again when its monetary policy committee meets next on August 4, with Governor Andrew Bailey hinting last week that policy makers could opt for a 0.50% rise.
The Royal Bank of Australia yesterday raised interest rates by 0 50% - the third month it a row the central bank has hiked borrowing costs.
John Stoltzfus, chief investment strategist at Oppenheimer & Co, said: "With the first half of the year moving into the rear-view mirror investors can't help but wonder what lies ahead in a year that thus far has wrought heightened levels of uncertainty, disruption and dysfunction that have rattled asset-class values across the spectrum of the good, the bad, and the ugly."
FTSE 100
The UK’s top share index, the FTSE 100, recovered some of yesterday's big losses when it was up 96 points at 7,121 shortly after opening this morning.
Brent crude futures also bounced back slightly from yesterday to be 1.46% ahead at $104.80 a barrel.
Companies reporting today
- Full-year results: Redde Northgate