The Bank of England says Britain is dealing with higher interest rates

[ad_1]

[1/2]People walk outside the Bank of England in the City of London financial district in London, Britain, May 11, 2023. REUTERS/Henry Nicholls // File Photo

LONDON (Reuters) – The Bank of England said on Wednesday that Britain’s economy has so far proven resilient to rising interest rates over the past year-and-a-half, but that it will take time for the full impact to permeate.

The bank raised interest rates last month to 5 percent, up from 0.1 percent at the end of 2021, raising concerns about damage to households, businesses and the broader financial sector that could push the economy into recession.

But in a semi-annual assessment of the health of the financial system, the Bank of England said there was no cause for concern.

Bank of England Governor Andrew Bailey said at a press conference: “The British economy and financial system has so far been resilient in the face of interest rate risks.”

We will continue to monitor credit conditions for any signs of tightening that cannot be explained satisfactorily by changes in the macroeconomic outlook.

The percentage of families with heavy mortgage burdens has been on the rise. But even taking into account the rising cost of living – inflation hit 8.7% in May – it is likely to remain below the peak seen in 2007.

On Tuesday, average interest rates on new two-year fixed-rate mortgages — the most popular form of housing financing — rose above their peak after last September’s mini budget to a 15-year high, according to data provider Moneyfacts.

Britain’s finance industry estimates that 800,000 households will need to refinance their more expensive mortgages in the second half of 2023, and another 1.6m in 2024.

The bank said that the usual mortgage holder later this year will pay 220 pounds ($285) per month, and by the end of 2026, nearly a million families will pay at least 500 pounds per month.

The number of households spending more than 70% of their income on mortgage payments, after taxes and other essential spending, is on track to rise to 650,000 by the end of the year, 2.3% of the total and below a peak of 3.4% in 2007.

Consumer credit is an even bigger source of trouble, with about 10% of households spending more than 80% of after-tax income, necessities and housing costs on debt service, up from 9% a year ago.

british banks

The Bank of England said that British banks were less exposed than households to the negative effects of higher interest rates, especially compared to financial institutions in other countries, while the corporate sector remained “broadly resilient”.

“However, higher financing costs are likely to put pressure on some of the smaller or highly leveraged companies,” she added.

The Bank of England saw particular risks in global commercial real estate and from corporate borrowing in the credit and leveraged lending markets.

After its annual “stress test” of the sector, the Bank of England said Britain’s eight largest lenders all had enough capital to handle high interest rates, and no financial need to keep interest rates low for savers or treat borrowers harshly.

“The capital and liquidity positions of major UK banks remain strong and profitability has increased, enabling them to improve their capital positions and support their clients.”

Banking stocks rose on expectations of higher shareholder payouts.

However, recent data showed the largest annual decline in home prices since 2011, and mortgage lending has also fallen sharply over the past year.

“Many lenders are cutting margins in an effort to maintain business levels, and they may have to reconsider their standards if they hope to maintain a healthy level of lending,” said Simon Gammon, managing partner at mortgage broker Knight Frank Finance.

The Bank of England’s Monetary Policy Committee left banks’ countercyclical capital reserve, a tool used to manage risk and lending during the credit cycle, unchanged at 2%.

The bank added that in the aftermath of the Silicon Valley bank collapse, it was working with the finance ministry to ensure there were options to smoothly wind down smaller banks that were exempt from some of the requirements applied to larger banks.

($1 = 0.7726 pounds)

Additional reporting by Andy Bruce, Suban Abdullah, Farooq Suleiman and Sachin Ravikumar Editing by Kevin Levy and Peter Graff

Our Standards: The Thomson Reuters Trust Principles.

[ad_2]