A member of the public walks through heavy rain near the Bank of England in May 2023.
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LONDON — The Bank of England on Wednesday warned that although household finances are faring better than expected, higher borrowing costs have yet to fully feed through to the economy.
In its half-yearly Financial Stability Report, the central bank noted that “the overall risk environment remains challenging” amid a sluggish domestic economy, further risks to global growth and inflation and heightened geopolitical tensions.
The Bank of England hiked interest rates by more than 500 basis points between December 2021 and August 2023, taking its main rate to a 15-year high in a bid to combat soaring inflation. Its Financial Policy Committee highlighted in the report that long-term interest rates in both the U.K. and the U.S. are now around their pre-2008 levels.
“The full effect of higher interest rates has yet to come through, posing ongoing challenges to households, businesses and governments, which could be amplified by vulnerabilities in the system of market-based finance,” the FPC said.
“So far, and while the FPC continues to monitor developments, U.K. borrowers and the financial system have been broadly resilient to the impact of higher and more volatile interest rates.”
Since its last FSR in July, household income growth has been greater than expected, the FPC noted, which has reduced the share of households experiencing high cost-of-living adjusted debt-servicing ratios. Meanwhile, a lower expected path for the Bank of England’s main interest rate has reduced the extent to which that share is likely to rise.
“Nevertheless, household finances remain stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments,” the FPC said.
“Arrears for secured and unsecured credit remain low but are rising as the impact of higher repayments is felt by borrowers.”
Companies’ ability to service their debt has improved on the back of robust earnings growth, and the FPC expects the corporate sector to remain largely resilient to the impact of higher rates and weaker economic activity.
“But the full impact of higher financing costs has not yet passed through to all corporate borrowers, and will be felt unevenly, with some smaller or highly leveraged UK firms likely to remain under pressure,” the FPC added.
“Corporate insolvency rates have risen further but remain low.”
Barbara Terrio is a seasoned business journalist, delving into the world of finance, startups, and entrepreneurship. With a knack for demystifying complex economic trends, she helps readers navigate the business landscape. Outside of her reporting, Barbara is an advocate for financial literacy and enjoys mentoring aspiring entrepreneurs.
