The Bank of England cautioned on Wednesday, December 6, 2023, that although household finances are doing better than expected, increased borrowing costs are yet to sail through the economy.
In its half-yearly Financial Stability Report (FSR), the central bank noted that the comprehensive risk environment remains demanding amid an idle domestic economy, posing further risks to global growth, inflation, and increased geopolitical tensions.
The Bank of England increased interest rates by more than 500 basis points between December 2021 and August 2023, taking its main rate to a 15-year high in an effort to fight increasing inflation.
Its Financial Policy Committee (FPC) focused in the report on the fact that extended interest rates in both the United Kingdom and the United States 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.
It further reads that while the FPC continues to observe developments, United Kingdom borrowers and the financial system have been broadly strong to the impact of higher and more evaporative interest rates.
The Committee noted that since its last financial report in July 2023, household income growth has been higher than expected.
This has lowered the share of households experiencing high costs of living. However, 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 have yet to be reflected in higher mortgage repayments,” the FPC said.
FPC added that arrears for secured and unsecured credit remain low but are rising as a result. Higher repayments are felt by borrowers, although corporate insolvency rates have revolted further but remain low.