The Bank of England has warned that the UK’s and the rest of the world’s economic outlook has “materially deteriorated.”
The price of energy and gasoline is rising significantly, which accelerates price increases globally. Nevertheless, the Bank asserted that UK banks would be able to survive even a severe downturn in the economy.
To prepare them for any storm, it advised banks to put extra money in rainy day accounts. The Bank’s remarks were included in its most recent Financial Stability Report.
According to international forecasters like the IMF and OECD, Britain is more vulnerable to recession and consistently high inflation than other Western nations. They are also dealing with shocks from the energy and commodity markets.
The Bank of England stated that the UK banking industry was prepared to weather a severe downturn but added that institutions needed to boost the amount of money they set aside to cushion shocks. As a result, banks will be obliged to set aside 2% of their assets as a buffer instead of the current requirement of 1%, beginning in one year.
Depending on how the overall state of the global economy plays out, the Financial Policy Committee said it could adjust the rate in either direction.
Due to rising electricity, food, and fuel prices, households have been stressed lately. After the price cap was raised by 54% to £1,971 for the typical household in April, home energy costs soared. According to experts, this may increase once again in October, to about £2,800, which might contribute to inflation later in the year reaching above 11%.
Debt problems may be a problem for certain homes. For example, about 80% of most mortgages have fixed interest rates right now, but 40% are up for renewal this year or the year next, which could increase their prices.
Although household budgets are becoming more strained, the Bank claimed that financial institutions were resilient to the debt vulnerabilities that exist in both consumers and corporations.
According to this report, the banking system appears to be comfortably able to withstand the biggest economic contraction in 300 years over the pandemic, stagflation, and the highest inflation in forty years. This says something about the lengths taken over the past 15 years to shore up the banking system’s resilience. As a result, the financial sector is not currently at risk as much as households and small businesses are.
The Financial Policy Committee stated that although household debt hasn’t increased significantly due to the cost of living crisis, it hasn’t decreased either. However, the Financial Policy Committee also believes that because of the government’s assistance program, the percentage of households that spend a significant portion of their income paying off debt will continue to be manageable despite rising interest rates.
