BoE has published the July 2023 Financial Stability Report, setting out FPC’s view on the stability of the UK financial system and what it is doing to remove or reduce any risks to it.
FPC notes that the current economic outlook is highly uncertain and the risk environment is challenging. UK household and business finances are under pressure from higher borrowing costs, but the banks remain resilient enough to support households and businesses even if future economic conditions are worse than predicted. In contrast, non-bank financial institutions continue to need more resilience.
Since the December 2022 report, global interest rates have risen further, reflecting actual and expected increases in central bank policy rates in response to continued inflation. This transition to significantly higher interest rates and greater market volatility has created stress in a number of financial system channels, with the report highlighting the failure of three mid-sized US banks and the global systemically important bank, Credit Suisse. FPC concludes that the UK economy has so far been resilient to interest rate risk, but believes that it will take time for the full impact of higher rates to be felt.
FPC has also published the Financial Stability in Focus report, where it sets out its view on the specific topic of interest rate risk. It concludes that while the rapid adjustment to higher rates has posed challenges in some sectors of the UK and global economies, large parts of the UK financial system have so far been resilient, partly due to a range of regulatory measures designed to manage interest rate risk and build resilience in to the system more generally.
Given the prevalence of variable rate and short-term fixed-rate mortgages and other loans in the UK, the impact of higher interest rates is comparatively lower than in some other jurisdictions.
FPC’s financial policy summary and record for July 2023 also highlights the impacts of higher interest rates, as well as its decision to maintain the UK countercyclical capital buffer rate at 2%