(Bloomberg) -- Investor exuberance as interest rates fall and growth recovers is one of the biggest risks to financial stability this year, according to a Bank of England policymaker.

Markets may ramp up risk levels dangerously as economic conditions improve and volatility reduces, Jonathan Hall, an external member of the BOE’s Financial Policy Committee, said Wednesday in testimony to the UK Parliament.

“If conditions seem calm, if volatility is low, then you could get a risk of exuberance — people taking on more risk because they think the market is more benign,” he said when asked about his biggest concern. “We have seen that, for example credit spreads are very tight. Equity markets, particularly in the US, are very strong.”

Hall was addressing the Treasury Committee alongside colleagues including Governor Andrew Bailey about the BOE’s financial stability report, published in December. The report was dominated by concerns about the stability of market finance. The BOE is watching a number of issues, including attacks on shipping in the Red Sea, as potential threats.

“Shipping traffic is being affected and is being rerouted,” Bailey said. “That will increase shipping prices and shipping costs. I think initially that will be an issue in the monetary policy world. I would say one of the things, fortunately, that hasn’t happened is that we have not had a prolonged spike in oil prices.”

Bailey told members of Parliament he was worried about private credit, which has grown substantially over the decade of low rates and falls into the less regulated non-banking sector, was worryingly “opaque.”

It is “very high on our list of issues to work on and watch carefully, because we do see developments in the market which causes us to want to understand more about them,” Bailey said. “It’s lending to people who are leveraged. That’s the point so the risk is there clearly.”

By contrast, households and businesses remain stable as officials played down concerns about indebtedness in both the mortgage market and among firms. “We have not seen a pronounced increase in unemployment. That’s relevant because historically one of the drivers of loan losses, particularly in the mortgage market, is unemployment,” Bailey said.

He added the mortgage market is “nowhere near as stretched as it was during the global financial crisis” and that it was “the same thing with small firms.”

Sarah Breeden, the BOE’s deputy governor for financial stability, said the quantitative tightening program was having only a “relatively small” impact on government bond markets despite fears about the wall of debt issuance this year. Some fear the BOE risks flooding the market by selling around £50 billion of gilts this year.

--With assistance from Irina Anghel and Andrew Atkinson.

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