A quick thought on the Bank of Canada rate hike from Stephen Brown, deputy chief north America economist:
The Bank of Canada’s 25bp hike today, taking the policy rate to 5.0%, is likely to be the last in this cycle. With the labour market loosening, core inflation declining and the survey indicators implying that inflation expectations are normalising, we expect the Bank’s next move to be a rate cut – albeit not until 2024.
Unlike in June, the decision to hike was correctly anticipated by the majority of forecasters and markets were pricing in an 80% chance of the move. The accompanying policy statement did not provide any explicit forward guidance, but the tone was hawkish. It noted that “while the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy”, while highlighting that strong immigration is initially putting upward pressure on activity and prices before any beneficial effect of reduced labour shortages is felt. Indeed, the Bank reiterated that “with three-month rates of core inflation running around 3½-4% since last September, underlying price pressures appear to be more persistent than anticipated.”
Reflecting those concerns, the Bank upgraded its forecasts for both GDP and inflation in the new Monetary Policy Report. It now expects quarterly GDP growth to average about 1% annualised for the next four quarters, well below the economy’s potential of nearer 2% but significantly better than the consensus forecast of a mild recession. The Bank has pushed back its assumption for when headline inflation will reach 2.0% to mid-2025, although its forecasts for inflation of 2.9% in Q4 2023 and 2.2% in Q4 2024 show it still expects significant improvement before then.
In terms of inflation at least, we think the Bank is taking a glass half-empty approach. Its own surveys imply that capacity and labour shortages have now mostly returned to pre-pandemic norms, while inflation expectations have eased considerably and should continue to decline as actual inflation falls. Despite the Bank’s hawkish bias and continued concern that “that progress towards the 2% target could stall”, we expect a further slowdown in GDP growth and evidence of easing core inflation to persuade the Bank to keep policy on hold over the rest of the year.
Closing summary
Almost 1 million UK homeowners will be forced to shell out at least £500 more a month to cover mortgage payments by the end of 2026, as borrowers suffer the “consequences” of rising interest rates, the Bank of England has warned.
Forecasts released on Wednesday showed that of the 4 million homeowners expected to roll on to new mortgage contracts over the next three years, the majority will be paying up to £220 more a month to cover the mortgage by the end of this year because of the difficulty of finding contracts with comparable rates.
The payments of more than 1 million borrowers are likely to rise by more than twice that amount by the end of 2026.
The UK’s largest banks are strong enough to weather a £125bn financial hit during a severe economic downturn, despite facing mounting stress from rising interest rates, according to the Bank of England.
Price rises for US goods and services hit a two-year low in June, a sign that inflation is continuing to ease as the economy responds to the US Federal Reserve’s rapid increases in interest rates.
Stock markets have rallied on the news, with the Nasdaq and S&P 500 on Wall Street hitting new 15-month highs, while European markets are all up more than 1%.
Our other stories:
Bank of Canada hikes rates to 22-year high of 5%
The Bank of Canada has raised its key rate by a quarter point to 5%, the highest in 22 years. The move had been expected by economists.
It expects inflation stay around 3% for the next year before gradually declining to its 2% target in mid-2025, six months later than previously thought.
NEW: The Bank of Canada raised interest rates for a second straight meeting, pushing back the timeline for inflation's return to target while revising growth upward https://t.co/M1ovptm4yj
— Bloomberg (@business) July 12, 2023
More reaction to the slowdown in US inflation and what it means for interest rates.
Marc Ostwald, chief economist & global strategist at ADM Investor Services International, said:
Increasingly it looks as though a July rate hike may be little more than the Fed erring on the side of doing too much, also an acknowledgement that the June CPI fall was to a Iarge extent base effect driven and the vulnerability to a renewed energy price shock remains ever present.
Nick Chatters, investment manager at Aegon Asset Management, questioned the need for further rate hikes.
We have been waiting for some time for inflation in the US to surprise to the downside, and today it finally did. There have been a multitude of different indicators all pointing to slowing inflation in the US; however, until now, it has remained stubbornly sticky. With the inflation data today coming in below forecast and the employment data last Friday surprising to the downside, why would the Fed hike later this month?
Powell said at the June meeting that the committee sees further hikes this year, which means this month is likely, but will today’s data change their view? I suspect not, but it should. Employment is not as strong as it was and inflation is cooling, rates are over 5%, and painful lags of past hikes are likely still to come. Keeping going because you told the market in the past that you would is not a good rationale for raising rates.
Here is our full story on US inflation:
The prices of US goods and services hit a two-year low in June, a sign that inflation is continuing to ease as the economy responds to the US Federal Reserve’s rapid increases in interest rates.
The latest consumer price index (CPI) figures, which measure the prices of a basket of goods and services, increased 3% over the last year. This was the smallest increase since March 2021 and down from a four-decade high of 9.1% in June 2022 as pandemic supply chain issues clashed with burgeoning consumer demand.
Even though inflation has continued to go down, price increases still remain higher than the Fed’s 2% annual target rate, meaning more interest rate hikes could come.
The tech-heavy Nasdaq and the S&P 500 indices on Wall Street have both hit 15-month highs.
The Nasdaq jumped 170 points, or 1.2%, to 13,932, while the S&P 500 rose 40 points, or 0.9%, to 4,480, their highest levels since April last year.
Economics journalist Holger Zschäpitz tweeted:
It looks as if the markets first underestimated the rise in inflation and now the plunge. US #inflation cools to 3% YoY in June from 4% in May; core dropped 50bps to +4.8% YoY down from +5.3%. pic.twitter.com/SUXPcO0npa
— Holger Zschaepitz (@Schuldensuehner) July 12, 2023
Chris Williamson, chief business economist at S&P Global Markit Intelligence said:
US CPI #inflation down to 3.0% in June - following the trend signalled in advance by the @SPGlobalPMI input prices index. Further fall to 2% looking harder to attain but watch out for flash PMI data for July due on 24th for an update. #FOMC pic.twitter.com/xZ7kXRaJ79
— Chris Williamson (@WilliamsonChris) July 12, 2023
The opening bell has rung on Wall Street.
The Dow Jones has climbed 220 points to 34,479, a 0.6% gain, after the better than expected inflation data. US inflation slowed to an annual rate of 3% in June from 4% in May.
Updated
Andrew Hunter, deputy chief US economist at Capital Economics, said:
The muted 0.2% month-on-month rise in core consumer prices in June won’t stop the Fed from hiking rates again later this month, but it supports our view that the downward trend in core inflation is set to accelerate over the second half of the year.
The rise in the headline index was also 0.2%, as modest rebounds in gasoline and energy services prices resulted in a 0.6% m/m rebound in overall energy prices. But the sharp downward trend in food inflation continued, with food at home prices unchanged on the month.
Base effects pushed the headline CPI inflation rate down from 4.0% to a 27-month low of 3.0%, as the last of the big rises in energy prices in the first half of 2022 dropped out.
Turning to core inflation, which excludes food and energy costs, he said:
The below-consensus 0.2% m/m rise in core prices, which saw core inflation fall to a 20-month low of 4.8%, is potentially even more encouraging than it looks, as it included a fall of only 0.5% m/m in used vehicle prices – with the wholesale auction data pointing to a cumulative decline of around 9% over the next couple of months. That was still enough to push overall core goods prices down by 0.1% m/m, with widespread declines now developing for imported goods like household furnishings and recreational goods.
The downward trend in shelter inflation continued, with CPI rent rising by 0.5% again but the larger owners’ equivalent rent index up by only 0.4%. There were also signs that gains in core services excluding housing are slowing. Although that was largely due to an 8.1% m/m plunge in airfares, which mainly reflects lower jet fuel prices rather than labour market conditions, it is nevertheless the sector Fed officials are watching most closely as they look for evidence the slowdown in core inflation will continue.
Lisa Abramowicz, who co-hosts Bloomberg Surveillance on Bloomberg TV and radio, noted:
If the US measured core inflation the same way that Europe does, it would be considerably lower than current measures show. https://t.co/77aMS46G9I pic.twitter.com/REJBFls8ML
— Lisa Abramowicz (@lisaabramowicz1) July 12, 2023
US consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside, but probably not fast enough to discourage the Federal Reserve from resuming raising interest rates https://t.co/n6JBD0ylRe
— Reuters (@Reuters) July 12, 2023
Here in the UK, inflation is running at 7.9%. The Bank of England will be jealous.
Neil Shah, executive director at Edison Group, said:
UK policymakers and the BoE will be looking enviously across the pond as US inflation continues to moderate at a steady pace. The latest headline inflation figures drop by one percentage point, even lower than expected. We are now seeing levels last seen in 2021, and getting ever closer to the Fed’s 2% target. Even core inflation, which has been significantly more stubborn in subsiding dropped to 4.8% in June. Central banks view this as the clearest indicator for rate-setting policy, so the Fed will be relieved to see core prices moving in the right direction.
Nevertheless, core inflation remains high, and [Fed chief Jerome] Powell is likely to continue on his course to squeeze inflation by raising rates at the FOMC’s next meeting. The US labour market remains tight, with high employment numbers and consistent wage rises, while the country’s housing market is showing remarkable resilience – all adding to the expectations of a further interest rate hike in late July. Markets seem to have priced in the newest inflation data, and we don’t expect any major moves as a result of the latest figures.
Financial markets are happy following the US inflation slowdown. The UK’s FTSE 100 index has jumped 118 points, or 1.6%, to 7,397. Stock markets in Germany, France and Italy were between 0.7% and 1.2% higher.
US futures are pointing to a higher open on Wall Street in 45 minutes’ time.
Naeem Aslam, chief investment officer at Zaye Capital Markets, was quick to send us his thoughts.
Cold as ice—that is the number that comes to mind when you look at the US CPI data. This is the lowest number since the pandemic, and this is certainly good news for the economy, but it is important to keep in mind that this is still a transitory situation. But overall, traders are cheering this event, and while futures have moved higher, the dollar index has lost more momentum.
The price for gold has become more interesting and bullish on the back of the US CPI data, as traders don’t expect the Fed to chop more wood now. The bitcoin price has become more interesting as well, and we have seen a jump in prices.
Overall, we think this is the best news for the markets so far this year when it comes to the US CPI data.
US inflation slows to 3% in June
NEWSFLASH: Inflation in the US has slowed more than expected to 3% in June, the lowest rate since 2021.
The annual inflation rate fell from 4% in May, according to government figures.
Core inflation, which strips out food and energy costs that tend to be volatile, was also lower than expected at 4.8%, while economists had expected a rise to 5%.
The investor Jeroen Blokland tweeted:
BREAKING! US Headline #Inflation fell to 3.0% in June, BELOW expectations.
— jeroen blokland (@jsblokland) July 12, 2023
Core #CPI fell to 4.8%, also BELOW expectations.
Rally on...? pic.twitter.com/1HzBfLZei2
Updated
Reuters economics reporter David Miliken has digested the Bank of England’s financial stability report in a series of tweets. He warns that aside from the mortgage crisis, the bigger problem is unsecured consumer debt, and that a significant minority of households are very stretched by their debts.
The Bank of England published its half-yearly review of the health of banks and borrowers. Big picture, no cause for alarm - the financial system is "resilient" and overall debt burdens on track to remain below pre-2008 levels.
— David Milliken (@david_milliken) July 12, 2023
But there are a number of caveats...
1/n
First for mortgage holders:
— David Milliken (@david_milliken) July 12, 2023
- the average person remortgaging over the rest of this year will see payments rise by £220 a month
- but through to the end of 2026, for nearly a million households payments will rise by over £500 a month
2/n pic.twitter.com/BpJyAV45A2
Many people with bigger mortgage bills are well-off - but not all.
— David Milliken (@david_milliken) July 12, 2023
Around 650,000 UK households will spend at least 70% of income after tax and other essential bills repaying their mortgage by the end of the year.
That's 2.3% of households (vs 1.6% last year and 3.4% in 2007)
3/n pic.twitter.com/LIGRiRRx47
But the bigger problem is unsecured consumer debt. Some 10% of people in Britain spend at least 80% of their income after tax, housing and other bills on servicing consumer loans, up from 9% last year.
— David Milliken (@david_milliken) July 12, 2023
Overall debt as a share of income is below pre-pandemic levels.
4/n pic.twitter.com/6wtxW2QaWu
So in short - does Britain as a whole face a debt crisis? No. Are a significant minority of households very stretched by their debts? Yes.
— David Milliken (@david_milliken) July 12, 2023
Full story (looking at banks and businesses too) here:
✍️ @reutersHuwJ @BillReuters @BruceReuters and mehttps://t.co/rfybXNISwS
Updated
Back to the mortgage crisis. John Burn-Murdoch, columnist and chief data reporter at the Financial Times, tweeted:
The UK mortgage time bomb numbers are bad enough as they are, but they get really sickening when you think of them as an effective pay cut.
— John Burn-Murdoch (@jburnmurdoch) July 12, 2023
An increase of £500 in monthly payments (coming to 1m households by 2026) is £6,000 per year, which equates to about a *£10,000 pay cut* pic.twitter.com/UZWbWb2sos
Neil Lee, professor of economic geography at the London School of Economics, said:
Basically there is a generation (mine) who hit their thirties in an asset price bubble, had to buy houses at that price, and are now going to be hammered by interest rates / asset depreciation
— Neil Lee (@ndrlee) July 12, 2023
Simon French, chief economist and head of research at Panmure Gordon, tweeted:
Important footnote in today's BoE Financial Stability Report. Debt Servicing Ratio on UK mortgages expected to go from 5.5% to 8% of household income but with <30% of households having a mortgage this will be more typically 16%, to above 25%. Recent Gilt market moves also… pic.twitter.com/5U8aNejjT5
— Simon French (@shjfrench) July 12, 2023
Wetherspoon’s sales jump as people seek cheaper food and drink
The pub chain JD Wetherspoon has reported soaring sales in recent weeks, as cash-strapped consumers look for cheaper food and drinks amid high inflation and the cost of living crisis.
Wetherspoon’s, which runs just under 830 pubs across the UK and Ireland, said its sales had risen by 11% in the 10 weeks since the start of May, compared with the same period in 2019, before the pandemic.
Striking an optimistic tone, the company said its sales of beverages and meals were also up 11.5% compared with a year earlier, as the chain shrugged off concerns that its customers were tightening their belts.
The boost to its sales appears to have accelerated in recent weeks, after lauding a record Easter and successful series of May bank holiday weekends.
Pound hits 15-month high after banks stress tests
The pound hit a fresh 15-month high after all major UK banks passed the Bank of England’s stress tests.
Governor Andrew Bailey was pretty upbeat, saying:
The UK economy and financial system have so far been resilient to interest rate risk.
But he noted that the full impact of higher interest rates had yet to be felt. The central bank surprised markets (and the public) with a half-point hike to 5% last month, in an attempt to bring inflation down. Markets expect rates to reach 6% by December.
Bailey said that the latest labour market data showed signs of cooling, although wage growth is still too high.
Sterling rose as high as $1.2970, the highest since last April, but has since fallen back to $1.2920.
Estate agent Winkworth warns on profits
The UK estate agent Winkworth has warned of a drop in profits, after sales slumped amid rising mortgage rates. The shares fell as much as 15% and are now down more than 3%.
The company explained:
The sales market proved to be more challenging in the second quarter of 2023 as interest rates rose higher and faster than anticipated. Mortgage approvals, which in Q1 recovered from the low levels seen in Q4 2022, were reported below the levels seen in the first half of last year.
Property prices have held up reasonably well but transactions have slowed, leading to a high number of agreed sales being delayed to the second half of the year.
Sales revenues fell 20% in the first half of the year compared with the same period last year. Lettings revenues rose 11%, as rising numbers of people cannot afford to buy because of rising interest rates and are forced to rent.
As a result of the property sales slump, Winkworth expects half-year profits to be below last year’s level.
Updated
Costas Milas from the University of Liverpool’s Management School, professor of finance and accounting, is puzzled by the Bank of England’s latest stress tests for the banking sector.
The severe hypothetical stress scenario is a Bank rate peak at 6% together with a UK unemployment rate peak at 8.5% and a UK real GDP real start-to-trough of -5%.
Here is the puzzling issue: The post-1960 average Bank rate has been 6.33%, that is, higher (!) than what is used in the severe scenario. Equally important, the current Bank rate is only one percentage point below the severe scenario “territory”.
My feeling is that the severe scenario should have used a much higher (than 6%) Bank rate. Otherwise, one might be tempting to argue that by raising (as markets expect) the Bank rate (much) higher than its current level of 5%, we might inflict quite an economic pain...
Updated
Bank's Cunliffe says number of households in distress will be 'considerably smaller' than in financial crisis
Earlier, Jon Cunliffe, the Bank’s outgoing deputy governor for financial stability (he retires in October), explained why household debt isn’t as big a problem as it was during the financial crisis of 2008-2009.
So there are some big differences between now and 2007. In 2007 inflation was not rising and interest rates were going down, whereas at the moment we’re seeing the opposite.
The big difference is that the amount of household debt that’s being carried is much lower now than it was at the time of the financial crisis so households aren’t really over-levered as they were before. And that’s one of the reasons why we think put households in distress whose debt service ratios, adjusted for inflation, will reach the levels where in the past you’ve seen distress – that proportion of households will be smaller than we saw in the financial crisis and considerably smaller.
Amid criticism of the Bank’s rate hikes, he said it needs to get inflation under control.
It’s clear that inflation hits the poorest of society worst and and that’s one of the key reasons why one needs to get it under control.
But if we’re thinking about mortgage arrears and the ability of households to pay, then I think the fact that households are carrying less debt than they were, and that’s in part because of the action that the Bank of England and the Financial Policy Committee took to put constraints on mortgage borrowing, that likely will leave us in a stronger position in terms of distress.
Updated
Bank of England chief says there 'will be consequences' of higher rates
The governor of the Bank of England said there “will be consequences” of higher interest rates on borrowers, as nearly one million mortgage holders could see their monthly repayments increase by about £500 in the next three years.
Andrew Bailey said at the press conference following the Bank’s latest Financial Stability Report:
It is going to have an impact clearly… that is part of the transmission of monetary policy, no question about that.
What we are seeking to do here… is balance having the transmission of monetary policy with – the two things that I would emphasise – the resilience of the banking system, and the ability to support customers and therefore manage the consequences of this.
But there will be consequences from increased interest rates I’m afraid because that, from a monetary policy perspective, is why we have to do it.
NEW@BankofEngland says its models show that nearly a million mortgage holders across the UK will see monthly repayment increases of £500 or more in the coming months - or £6,000 a year. pic.twitter.com/sgpJUCzJ82
— Ed Conway (@EdConwaySky) July 12, 2023
Updated
Andrew Bailey said there are some signs of the labour market cooling, referring to yesterday’s data.
He also said that low levels of unemployment are helping households cope with higher borrowing costs:
We have a much stronger labour market… It is helping a lot in terms of the stress that households are seeing.
He took aim at pay deals again, saying they are pushing up inflation.
The current level of pay increases are not consistent with inflation targets. That’s I’m afraid a fact of life and we we have to deal with that.
Sam Woods, head of the Prudential Regulation Authority, which oversees the UK banking and insurance sectors, said while small landlords with buy-to-let mortgages also face higher payments as interest rates rise, the Bank is not worried about their ability to keep up with payments. On average, their monthly repayments are set to go up by £275 by the end of 2025.
On small landlords, we are not very concerned by that from a financial stability point of view.
Updated
Here is Kalyeena’s story:
The UK’s largest banks are strong enough to weather a £125bn financial hit during a severe economic downturn, despite facing mounting stress from rising interest rates, the Bank of England said.
The central bank’s annual stress test of the country’s biggest lenders – which include NatWest, Barclays, HSBC, Lloyds, Standard Chartered, the UK arm of Santander, Nationwide building society and Virgin Money UK – determined that they would be able to continue lending to households and businesses even if conditions worsened.
While the Bank of England only tested interest rates rising to 6% – which is not far beyond current levels of 5% – the scenario also involved a deep recession where GDP contracts by 5%, unemployment doubles to 8.5%, and a housing crash in which prices fall by a third.
Asked by the Guardian’s banking correspondent Kalyeena Makortoff about the impact of higher mortgage payments – set to rise by £500 a month by the end of 2026, Bailey said:
It is going to have an impact, clearly. That is part of the transmission of monetary policy, no question about that.
At the press conference, Bank of England governor Andrew Bailey said both consumers and banks are in better shape than at the onset of the financial crisis in 2007:
We have a set of borrowers who are less exposed ... And secondly, we also have a banking system that is more able to support its customers.
Updated
Average two-year fixed mortgage rate hits 6.7%
Two-year fixed mortgage deals have become more expensive again.
The average rate on a two-year fixed residential mortgage has risen to 6.7% from 6.66%%, the highest since August 2008. The average five-year fix has climbed to 6.2% from 6.17%, the highest since last October, according to the financial data firm Moneyfacts.
Updated
The Bank of England governor, Andrew Bailey, has started his press conference about the financial stability report, the Bank’s biannual health check on the UK economy. You can watch it here.
1 million households face £500 rise in monthly mortgage payments by end 2026
Around a million households with a fixed-rate mortgage will see their monthly mortgage repayments go up by about £500 by the end of 2026, according to the Bank of England.
For the average household, monthly interest payments will go up by about £220 if they remortgage during the second half of this year and their rate goes up by about 3.25 percentage points, its latest financial stability report said.
Around 4.5 million people with a fixed-rate mortgage have seen their monthly repayments go up since interest rates started to rise in late 2021, the Bank found.
Another four million households on a typical two-year or five-year fixed deal face higher payments by the end of 2026.
However, a growing number of mortgage holders are either extending the length of their deal or overpaying their mortgage to cushion the impact of higher rates, the Bank said.
The number of mortgages in arrears has “increased slightly” over the first three months of the year but remained low by historical standards, and it will take time for the full impact of rate hikes to come through, the report found.
Ed Conway, economics editor at Sky News, tweeted:
NEW@BankofEngland says its models show that nearly a million mortgage holders across the UK will see monthly repayment increases of £500 or more in the coming months - or £6,000 a year. pic.twitter.com/sgpJUCzJ82
— Ed Conway (@EdConwaySky) July 12, 2023
BBC economics editor Faisal Islam said:
Bank of England just put out biannual assessment of financial stability risk
— Faisal Islam (@faisalislam) July 12, 2023
Basic message -risks around interest rate rises manageable.
Household debt service ratios up but wont go as high as in 2007.
Banks have enough capital even to withstand another global financial crisis pic.twitter.com/OfPZ2SYUUW
Updated
Bank warns 'vulnerabilities remain' for pension funds, insurers, hedge funds
However, it is more concerned about pension funds, insurers and hedge funds, saying “vulnerabilities remain”.
For instance, over recent months, leveraged hedge funds have built up large positions in US Treasury futures, which market intelligence suggests are relative to bonds or swaps. If these markets were to move sharply, deleveraging these positions could further amplify stress.
These risks, and other underlying vulnerabilities in the system of market-based finance identified by the financial policy committee and financial stability authorities globally, remain largely unaddressed and could resurface rapidly.
Last autumn, the Bank had to step in to rescue pension funds amid turmoil in financial markets caused by the former chancellor Kwasi Kwarteng’s disastrous “mini-budget” of unfunded tax cuts.
BBC News economics correspondent Andy Verity tweeted:
The @bankofengland's latest Financial Stability Report sounds another warning this morning about pension funds, insurers and hedge funds - saying 'vulnerabilities remain' following the episode last autumn where the bank had to step in to rescue LDI pension funds.
— Andy Verity (@andyverity) July 12, 2023
All major UK banks pass stress tests
All major UK banks have passed the central bank’s latest stress tests – Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK, Standard Chartered and (from December 2020) Virgin Money.
Banks have made higher profits, totalling £17.9bn in the first three months of the year (excluding provisions for bad loans), up 21% on the previous quarter, swelled by strong interest income as as well as other income. The Bank of England said:
The increase in profitability enabled banks to improve their capital positions, while supporting their customers.
The small and medium-sized UK bank sector is also well capitalised and maintains strong liquidity positions, the central bank said.
The stress tests for the major banks assumed that interest rates would rise to 6%, above the 4% used in previous tests; that UK GDP contracts by 5%, and unemployment more than doubles to 8.5%, while house prices fall by 31%.
Michael Hewson, chief market analyst at CMC Markets UK, said:
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.
Updated
Higher interest rates are also increasing pressure on UK landlords with buy-to-let mortgages. The report said:
Higher interest rates, together with other factors, are also putting pressure on buy-to-let landlords’ profitability, which has caused some to sell up or pass on higher costs to renters.
The private rented sector is an important part of the UK housing market, covering almost a fifth (19%) of households. Many private landlords take out mortgages to fund their investment: around 7% of the total UK housing stock has a buy-to-let mortgage on it and this type of lending comprises around 18% of the overall mortgage market by value, the Bank said.
Updated
In the UK, more households are being affected by higher interest rates as fixed-rate mortgage deals expire, the Bank of England’s report said.
The mortgage debt-servicing ratio (DSR), which measures the proportion of post-tax income spent on mortgage payments across all households, is forecast to increase from 6.2% to around 8% by mid-2026. If that were the case, this share would remain below the peaks seen in both the 2007–08 global financial crisis and the early 1990s recession, despite interest rates now being at a similar level to those prior to the financial crisis.
The proportion of households with high debt service ratios, after accounting for the higher cost of living, has increased and is expected to continue to do so through 2023. But it is projected to remain some way below the historic peak reached in 2007.
There are several factors that should limit the impact of higher interest rates on mortgage defaults. Given robust capital and profitability, UK banks have options to offer forbearance and limit the increase in repayments faced by borrowers, including by allowing borrowers to vary the terms of their loans. There are now stricter regulatory conduct standards for lenders with respect to supporting households in payment difficulties.
And on 23 June, the UK’s biggest mortgage lenders, the chancellor and the Financial Conduct Authority (FCA) agreed new support measures for mortgage holders. Struggling mortgage holders will be given a 12-month grace period before repossession proceedings begin.
Updated
Introduction: Bank of England warns rising interest rates causing stress among indebted firms and consumers
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The Bank of England has warned about signs of rising stress among the most indebted consumers and smaller businesses as interest rates have risen sharply around the world, although overall the UK economy has so far proved resilient.
The failure of three mid-sized US banks, and a “global systemically important bank” – Credit Suisse – caused volatility in financial markets, the central bank’s financial policy committee said in its latest financial stability report. You can read it here.
The impact on the UK banking system through lower bank equity prices and increases in funding costs was limited, and market risk sentiment has stabilised since then. Nonetheless, elements of the global banking system and financial markets remain vulnerable to stress from increased interest rates, and remain subject to significant uncertainty, reflecting risks to the outlook for growth and inflation, and from geopolitical tensions.
The UK economy has so far been resilient to higher interest rates, though it will take time for the full impact of higher interest rates to come through, the Bank said.
Our Financial Stability Report looks at the risks in our financial system and what we are doing to ensure households and businesses can rely on it. https://t.co/Pobt3xndiO #FinancialStabilityReport pic.twitter.com/atOJiM7Sfz
— Bank of England (@bankofengland) July 12, 2023
Turning to businesses, the report said:
Overall, UK businesses are expected to remain broadly resilient as the impact of higher interest rates comes through, but there will be increased pressure on some smaller and highly indebted businesses.
It flagged risks to riskier corporate borrowing from higher interest rates, and the commercial property sector:
Riskier corporate borrowing in financial markets – such as private credit and leveraged lending – appears particularly vulnerable, and global commercial real estate markets face a number of short and longer-term headwinds that are pushing down on prices and making refinancing challenging.
The FPC has also looked at consumers, mortgages and borrowing on credit cards and concluded:
Distress among the most indebted may have increased. Contacts in the debt advice charity sector indicate that the scale of difficulties faced by those seeking debt advice has increased…
Although the proportion of income that UK households overall spend on mortgage payments is expected to rise, it should remain below the peaks experienced in the Global Financial Crisis and in the early 1990s.
For the typical mortgagor rolling off a fixed-rate deal over the second half of 2023, monthly interest payments would increase by around £220 if their mortgage rate rises by the 325 basis points implied by current quoted mortgage rates.
UK banks are in a strong position to support customers who are facing payment difficulties. This should mean lower defaults than in previous periods in which borrowers have been under pressure.
Major UK banks have been stress tested using a severe stress scenario that is much worse than the economic outlook the Bank expects. The stress scenario included the unemployment rate increasing to 8.5%, inflation rising to 17%, and house prices falling by 31%.
The results of this stress test showed that the UK banking system would continue to be resilient, and be able to support households and businesses, even if economic conditions turned out to be much worse than we expect.
Separately, the Treasury’s tax and spending watchdog is preparing to sound the alarm over the impact of rising interest rates on the public finances, delivering a serious blow to the government’s scope for pre-election tax cuts.
Also coming up later today: the latest US inflation numbers. We are expecting a further slowdown.
The Agenda
9am BST: Bank of England governor Andrew Bailey press conference
1.30pm BST: US Inflation for June (forecast: 3.1%, previous: 4%)
3pm BST: Bank of Canada interest rate decision (forecast: rise to 5% from 4.75%)
Updated
