The Bank of England (BoE) has warned that the outlook for the UK and the global economy has “materially deteriorated” due to inflationary pressures largely fueled by Russia’s invasion of Ukraine. which have put additional strain on British family and business finances.
The worsening economic outlook has led to volatility in world markets in recent months with more turmoil, the Bank said in its quarterly health check on the UK financial system.
UK banks will have to book more cash to absorb the shocks in the markets from next year, but they are in good shape to provide support to households and businesses, he added.
“The economic outlook for the UK and the world has deteriorated materially,” the BoE said in its latest financial stability report. “Prices of essential goods such as food and energy have risen sharply in the UK and around the world, and growth prospects have worsened. This is largely the result of the illegal invasion of Ukraine by of Russia.
“These higher prices, weaker growth and tighter financing conditions will make it difficult for households and businesses to pay or refinance debt. In the face of this, we expect households and businesses to be more in the coming years. months. They will also be more vulnerable to new shocks. “
BoE officials have ordered UK banks to allocate 2% of their capital (about £ 22 billion) as part of the countercyclical capital cushion from this time next year.
The shock absorber, introduced in the wake of the financial crisis to ensure banks have a fund for rainy days, was reduced to zero during the pandemic, freeing billions of pounds to help businesses and households. Officials stressed that they are willing to re-release cash, especially if the economy works worse than currently expected.
However, the Bank said that most households and businesses entered the current financial crisis with relatively low levels of indebtedness and would be in a similar position in December.
Although the Russian invasion of Ukraine has raised commodity prices and raised inflation to its highest level in 40 years, most households and businesses are expected to cope with the financial burden. additional without default on mortgages and loans.
Inflation is expected to rise to 11% by the end of the year and the central bank’s core interest rate could rise to 3% by the end of 2023, according to some economists.
Rising costs are expected to depress the standard of living of many families and put many people in financial difficulties.
However, he said around 80% of UK mortgages are on fixed-rate offers and although 40% should be refinanced over the next 18 months, mortgage payers were in a good position to pay higher interest.
However, the central bank, which regulates banks and insurance companies, said a deteriorating global economic outlook as inflation affected consumers’ purchasing power and corporate profits increased a number of risks to the financial sector worldwide.
“The outlook is subject to considerable uncertainty and there are a number of downside risks that could negatively affect the UK’s financial stability,” the BoE said.
The UK unemployment rate will rise over the next year and corporate profits will be under pressure “especially in the energy-intensive sectors and sectors I most exposed to the fall in real household incomes,” the report says.
Commodity markets had become more volatile, creating risks that financial markets could take.
Buyers of wheat, metals and oil needed to borrow funds worth several times the sums required last year to buy the same level of goods, which put pressure on lenders.
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However, there was little evidence of a “cash rush” on the part of investors in a repeat of the panic in March 2020, when at the onset of the pandemic money market funds acting as lenders of ‘last resort found themselves without the firepower needed to provide their usual supporting role.
The report said that rising interest rates on many of the world’s central banks would also endanger heavily indebted businesses and governments.
U.S. and Chinese companies that have been heavily indebted and EU governments with high levels of indebtedness were a potential risk, the report adds.