According to the Bank of England, the UK economy is adjusting to higher rates

The Bank of England said on Wednesday that although Britain’s economy has so far shown resilience to an increase in interest rates over the past 18 months, it would take time for the full impact to be felt.

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Last month, the Bank increased interest rates to 5% from 0.1%, which they had been at the end of 2021. This caused concerns about the impact on consumers, businesses, and the larger financial sector, which could cause the economy to enter a recession.

But the BoE stated that there was no cause for panic in its semi-annual review of the state of the financial system.

BoE Governor Andrew Bailey stated during a news conference that “the UK economy and financial system has so far been resilient to interest rate risk.”

“We will continue to monitor credit conditions for any signs of tightening which are not satisfactorily explained by changes in the macroeconomic outlook.”

The percentage of households with high levels of debt was increasing, but even taking into account the higher cost of living (inflation was 8.9% in May), it was projected to stay below the 2007 peak.

According to data source Moneyfacts, on Tuesday, average interest rates for new two-year fixed-rate mortgages—the most popular type of housing financing—rose above their peak following last September’s mini-budget to a 15-year high of 6.66%.

According to estimates from the British financial sector, 800,000 households will need to switch to more expensive mortgages in the second half of 2023 and another 1.6 million homes in 2024.

The Bank predicted that by the end of 2026, over 1 million families would be paying at least 500 pounds a month more than the average mortgage holder who refinances later this year.

In particular, it claimed, as compared to financial institutions in other nations, British banks were less vulnerable to the negative effects of rising interest rates than households, while the business sector remained “broadly resilient.”

However, it continued, “some smaller or highly leveraged firms are likely to come under pressure from higher financing costs.”

The BoE identified specific concerns from corporate borrowing in the private credit and leveraged lending markets as well as from international commercial real estate.

Following its annual “stress test” of the industry, the BoE declared that each of the eight largest lenders in Britain has sufficient capital to withstand higher rates:

Major UK banks’ capital and liquidity positions are still strong, and their profitability has improved, allowing them to serve their customers and strengthen their capital positions.

Banks’ countercyclical capital buffer, a measure for managing risk and lending during the credit cycle, was left at 2% by the BoE’s Financial Policy Committee.

The Bank further stated that, in the wake of Silicon Valley Bank’s failure, it was collaborating with the finance ministry to guarantee that there were ways to efficiently close out smaller banks while exempting them from some regulations that applied to larger ones.

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