Duncan ScottThe Bank of England’s Financial Policy Committee (FPC) has published its December 2022 Financial Stability Report setting out its view on the stability of the UK financial system and what it is doing to remove or reduce any risks to it.
Overall, the FPC notes that the outlook for growth and unemployment in the UK and globally has deteriorated further since its last report in July. In particular, prices – especially those of food and energy – have seen steep rises placing increased pressure on consumer budgets. The response from central banks (i.e. to raise interest rates) has caused a concurrent rapid rise in borrowing costs for consumers and businesses.
However, the FPC expects the UK banking sector to be resilient enough so as to be able to withstand an economic downturn much worse than the one currently anticipated. It therefore expects that banks will be able to support creditworthy households and businesses through the current downturn. As a consequence of this resilience the FPC intends to maintain the counter-cyclical buffer at its current level of 2% until July 2023.
The FPC sees a need for for urgent international action to reduce risks in non-bank finance in 2023, partly in response to the risks exposed to be inherent in UK pension schemes reliance on liability driven investment funds at the end of September 2022 when there were sudden, large moves in the interest rates on UK government debt.