The United Kingdom’s economy has demonstrated resilience amidst significant interest rate increases over the previous eighteen months, according to a statement from the Bank of England on Wednesday. However, the institution notes that the full impact of these rate hikes is yet to be felt.
Date: July 12, 2023
Place: New Delhi, India
Interest rates were boosted to 5% last month from a mere 0.1% at the end of 2021 by the Bank. This move sparked concerns about potential economic downturn as households, businesses, and the larger financial sector are put under stress.
In its semi-annual review of the financial system’s health, the Bank of England dismissed any immediate concerns.
The UK economy has so far been resilient to interest rate risk, though it will take time for the full impact of higher interest rates to come through,” it stated.
Despite the rising number of highly indebted households and the growing cost of living – inflation stood at 8.9% in May – it is predicted to remain under the peak level seen in 2007.
New two-year fixed-rate mortgages, the most prevalent type of housing finance, saw their interest rates surpass their peak following last September’s mini-budget, reaching a 15-year high of 6.66%, as reported by data provider Moneyfacts on Tuesday.
The finance industry in Britain estimates that about 800,000 households will need to switch to costlier mortgages in the latter half of 2023, with an additional 1.6 million following suit in 2024.
The Bank predicts that the average mortgage holder who refinances later this year will face an additional monthly cost of 220 pounds ($285). By the end of 2026, nearly a million households are anticipated to pay at least an extra 500 pounds per month.
However, it noted that British banks are less vulnerable to higher interest rates’ adverse effects than households, especially compared to financial institutions abroad. The corporate sector continues to show broad resilience, although higher financing costs could strain smaller or highly leveraged firms.
Potential risks were identified in global commercial real estate and corporate borrowing in private credit and leveraged lending markets.
The Bank reassured that Britain’s eight largest lenders are adequately capitalized to deal with higher rates, following its annual sector ‘stress test’.
Major UK banks’ capital and liquidity positions remain robust and profitability has increased, which enables them both to improve their capital positions and to support their customers,” the Bank noted.
The Bank’s Financial Policy Committee maintained banks’ counter-cyclical capital buffer, a risk and lending management tool, at 2%.
In the aftermath of Silicon Valley Bank’s collapse, the Bank said it is collaborating with the finance ministry to establish strategies for the orderly wind-up of smaller banks exempted from certain larger bank requirements.
BoE Governor Andrew Bailey is scheduled to reveal the report’s findings in a press conference at 0800 GMT.
($1 = 0.7726 pounds)
To sum up, The UK economy shows resilience to interest rate hikes, according to the Bank of England. While the full impact is still pending, UK banks are adequately capitalized and broadly resilient.
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