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Bank of England (BoE) governor Andrew Bailey believes "increasing tariffs creates the risk of fragmenting the world economy" and weighing on activity.

Referring to Donald Trump's trade policies, Bailey made the comments in a pre-prepared speech shared ahead of the annual Financial and Professional Services Dinner at Mansion House on Tuesday evening. Chancellor Rachel Reeves also made a speech at the dinner.

"To say that the state of the global economy and the impact of tariff announcements is in the news and significant is an understatement," Bailey said. "The shifts we have witnessed — and continue to witness — mark a generational change in the system of trade amongst nations."

He said: "Recent events have exposed fault lines in the multilateral system of relations between nations, including in the global trading system, and a perceived failure to deal with what are seen as persistent global imbalances."

The BoE governor explained that these trade imbalances are expected to self-correct over time, if the global economic system is working efficiently.

Bailey highlighted the examples of China and the US, which between them, account for nearly 40% of the world's current account imbalances.

A country's current account balance of payments is a measure of its international transactions with the rest of the world, tracking the flow of goods, services and income.

Bailey said that China has a current account surplus of 2.3% of national gross domestic product (GDP) and 0.4% of global GDP, according to IMF data. A current account surplus is when a country is exporting a greater value of goods than it is importing.

"It appears that the surplus primarily reflects the weakness of domestic consumption in China, which in turn reflects an investment and export-led growth strategy and weaker social safety nets domestically," Bailey said.

He said: "As Chinese incomes have increased, the self-correction mechanism has been weaker because the domestic incentives to save have remained strong".

Meanwhile, the US has a current account deficit of 3.9% of national GDP and 1% of global GDP, meaning the value of its imports are higher than its exports.

Bailey said he believes that there are two reasons why this trade dynamic has not self-corrected. One of which, he says, is that as a consequence of its stronger productivity and economic growth, "domestic wealth has risen and foreign capital has flowed into the US allowing it to run a larger external deficit, thus reducing the downward pressure on domestic demand."

The second reason is that "people outside the US have been willing to take on its obligations — i.e. buy its assets".

Bailey said that one of the key points from these examples, is that "the underlying drivers of imbalances are domestic macroeconomic policies".

The other is that "the US does need to explain how it can regard its internal imbalance as sustainable and its external imbalance as not so, and how it envisages the internal balance responding to an adjustment of the external balance flowing from tariffs taking effect. And China needs to explain how it will tackle its persistently weak domestic consumption."

He added that the pressure to adjust these imbalances "can come more through threats of tariffs and trade barriers. But increasing tariffs creates the risk of fragmenting the world economy, and thereby reducing activity."

"There is therefore a common interest globally in tackling excess imbalances before dangerous levels of trade restrictions come into play, and before we face the prospect of difficult adjustment with macroeconomic volatility and financial instability," he said.

Markets have been rocked this year by Trump's fast-moving tariff agenda, with concerns that the US president's trade policies could tip the global economy into a recession.

Data released on Tuesday showed that US inflation rose to 2.7% in June, up from 2.5% in May, as investors continued to look for signs that Trump's tariffs may be starting to work their way through to consumer wallets.

Meanwhile, JPMorgan (JPM) CEO Jamie Dimon warned in the investment bank's latest earnings release on Tuesday that "significant risks persist — including from tariffs and trade uncertainty, worsening geopolitical conditions, high fiscal deficits and elevated asset prices."

Trump announced sweeping tariffs on what he dubbed "Liberation Day" on 2 April but later announced a 90-day pause on many duties and has since added a further extension to this deadline to 1 August for countries to negotiate trade agreements.

However, over the weekend, Trump threatened the EU and Mexico with 30% tariffs and Canada with a 35% levy rate. In addition, on Monday, the US president also threatened Russia with "severe" tariffs if a deal is not reached to end the war with Ukraine within 50 days.