The Bank of England recently released a report indicating that British mortgage holders and businesses are managing to cope with the current high interest rates. Despite challenges in the global financial risk environment, the overall debt levels in the UK are significantly lower than those experienced during the 2008 financial crisis. The BoE highlighted concerns about specific sectors such as private equity but reassured that the financial system in Britain is well-protected against potential shocks.
The BoE’s Financial Policy Committee emphasized that UK borrowers have shown resilience in the face of rising interest rates. With the main interest rate maintained at 5.25%, the highest in almost 16 years, the BoE acknowledged that inflation is moving in a direction that may prompt a rate cut. Despite this, over half of households with mortgages have experienced an increase in debt payments since the rate hikes began in December 2021. The forecasted rise in mortgage debt service ratios from 7.0% to 8.4% by the end of 2026 remains slightly below previous projections.
While the proportion of households with high debt costs relative to their cost of living is expected to marginally increase, it remains well below the levels observed post the global financial crisis. The BoE did, however, highlight a growing trend of mortgages with 30-year terms and expressed concerns about very low-income households struggling to meet basic needs such as food, despite not being in debt that poses broader financial risks.
Britain’s economy entered a shallow recession in the second half of 2023, but recent data suggests a return to growth with a modest expansion anticipated in 2024. Corporate insolvencies in England and Wales have seen a significant increase, particularly among very small businesses. The BoE noted that despite the challenging economic conditions, corporates have generally remained resilient to high interest rates and weak growth.
While the report indicates that British mortgage holders and businesses are managing the current high interest rates, there are underlying concerns about debt levels, particularly among low-income households and small businesses. The BoE’s monitoring and proactive measures will be crucial in ensuring the stability and resilience of the UK financial system in the face of ongoing challenges.