The Bank Of England Reports That The United Kingdom Is Currently Adjusting To Higher Interest Rates But Anticipates Future Risks

The BoE stated on Wednesday that "the overall risk environment remains challenging, reflecting subdued economic activity, further risks to the outlook for global growth and inflation, and increased geopolitical tensions.

The BoE stated in its half-yearly Financial Stability Report that wage and income growth that have been more robust than anticipated since its last review in July have alleviated some of the pressure on households.

"Nonetheless, 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 BoE said.

Additionally, businesses had demonstrated a general resilience to weak growth and higher interest rates, the report said, "but the full impact of higher financing costs has not yet been passed on to all borrowers."

Concerned about the enduring consequences of the inflationary surge of the previous year, the British central bank increased interest rates at fourteen consecutive meetings from December 2021 to August 2022, reaching a 15-year peak of 5.25%, where they have remained ever since.

Officials from the Bank of England (BoE) acknowledge indications of an economic downturn but state that they have no plans to reduce the Bank Rate due to indications that inflationary pressure will remain elevated.

The BoE stated that it was urging banks to proactively prepare for potential challenges in their funding strategies, in light of the shift in deposits from traditional current accounts to higher-interest, fixed-term savings accounts, which attract higher costs.

In addition to stating that "the UK banking system is well capitalised and has high levels of liquidity," the BoE predicted that profitability would remain robust despite the likelihood that net interest margins have reached their zenith.

Nonetheless, the run on Silicon Valley Bank earlier this year in the United States demonstrated how abrupt increases in withdrawals could affect lenders, and the possibility of digital currencies also had ramifications for the stability of deposits at lenders.

The BoE identified potential risks such as a deterioration in China's real estate market and Middle Eastern tensions that could increase energy prices and impede economic growth.

The BoE stated that increased short and long positioning by hedge funds and asset managers in U.S. Treasuries and outflows from funds invested in risky corporate debt could exacerbate further market volatility.

The central bank announced in 2024 that it would monitor the hazards that the rise of artificial intelligence could pose.