The latest set of stress tests by the Bank of England have shown that the UK banking sector is resilient and well able to handle the problems caused by the sudden rise in interest rates that is currently putting the UK economy and households under increasing pressure financial stress.
The criteria were adjusted higher from similar tests in 2019 and are based in the following.
It is assumed UK monetary policy tightens, with Bank Rate assumed to rise from under 1% to 6%, in the first three quarters of the scenario, above the 4% used in previous tests.
UK GDP contracts by 5.0%, and unemployment more than doubles to 8.5%, while residential property prices fall by 31%.
The Bank of England went on to say that all 8 UK banks, would continue to be resilient in such a scenario and well positioned to support households and business, even if financial conditions worsened and rates were to go higher from here.
We’ve seen significant weakness so far this year particularly from the likes of Lloyds Banking Group and NatWest Group, who are particularly exposed to domestic factors after paring back their investment banking divisions so today’s results are likely to be good news for these two especially, and should offer a respite to recent weakness in their share price.
The Bank of England went on to say that the portion of UK households with high debt ratios was likely to rise, and that while they are borrowing more, arrears are currently low. While this may be true this figure on arrears is likely to rise due to the lag effects of monetary policy.
Most mortgage borrowers are on fixed rate mortgages with about 4.5m set to see a rise in repayments on loans that were set more than two years ago.
When these come up for refinancing any new rate could see a typical payment rise by £220 a month.
To give an indication of how much 2-year rates have risen, 12 months ago UK 2-year gilt yields were at 1.68%. They are now just below 5.5%. Similarly, 5-year gilt yields have risen from 1.55% to 4.9%.
When these deals roll-off and refinance, the size of mortgage payers monthly repayment will soar, which means homeowners may well have to consider various options including switching to interest-only repayments if rates continue to remain high.
The rise in rates is already hitting the buy to let sector with the Bank of England saying that landlords are already starting to sell, which is positive in terms of new supply, however it also means that the rental sector will get tighter as supply comes off the market.
For businesses corporate insolvencies are increasing but are still low.