UK households under pressure from high rates, but economy resilient, BoE says

The Bank of England (BoE) warned on Wednesday that its interest rate increases were far from having finished having their effects on British households already under pressure, but the institution assured that the British economy was sufficiently resilient to withstand the shock.

Household finances remain under pressure from increased living costs and high interest rates, some of which has not yet been reflected in the increase in the cost of loan repayments, details the BoE in its semi-annual report on financial stability published on Wednesday.

After 14 consecutive rate increases, the British central bank ended its cycle of monetary tightening in September, maintaining its interest rates at 5.25%, the highest level since the start of 2008.

The BoE predicts that the full effect of these increases will only be felt by Britons by the end of 2026. Meanwhile, it expects the proportion of highly indebted households to increase over the next year.

According to the monetary institution, the situation is complicated by increased geopolitical tensions, particularly in the Middle East, which reinforce uncertainty over energy costs, weak growth and inflation which remains high (currently 4 .6% over one year in the country).

The BoE, however, highlights the resilience of the private sector, as the ability of UK businesses to repay their debts has improved thanks to rising earnings.

Furthermore, the domestic banking sector is well capitalized and has high levels of liquidity, and therefore has the capacity to support households and businesses should (economic) conditions deteriorate substantially.

The British institution also believes that non-bank financial players present a significant level of vulnerability, even in certain sectors, increasing since its last financial stability report in July.

Less regulated than the big banks, these shadow financial players can be the source of significant shocks.

In September 2022, the BoE was forced to intervene when the cost of very long-term British debt soared in the crowd of very expensive and unquantified budgetary announcements from the short-lived government of Liz Truss, a movement exacerbated through pension fund investments.

The BoE also reiterated on Wednesday that while the cryptocurrency sector does not currently pose systemic risks, it could if acceptance of digital currencies accelerates over time.

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