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Bank of England warns higher rates and inflation to squeeze households in 2023

Bank of England warns higher rates and inflation to squeeze households in 2023

The Bank of England warned on Tuesday about "significant pressure" on households and businesses due to higher inflation and borrowing costs, but said they were more resilient than before the global financial crisis.
The BoE had previously flagged that Britain was entering a lengthy recession and, with inflation at a 41-year high and a sharp rise in interest rates over the past year, government forecasters have predicted a record squeeze on living standards.

"Falling real incomes, increases in mortgage costs and higher unemployment will place significant pressure on household finances," the BoE said in its half-yearly Financial Stability Report.

Around 4 million households are likely to face higher mortgage payments in 2023, with the average monthly mortgage payment rising to 1,000 pounds ($1,228) from 750 pounds, equivalent to about 17% of pre-tax income.

But 2.4% of households would find themselves with mortgage payments that they would find hard to afford, the BoE's Financial Policy Committee (FPC) predicted.

Compared with during the 2008 global financial crisis and the recession in the early 1990s, this was a smaller proportion, in part because more households have fixed-rate mortgages and lending regulations are stricter than in earlier decades.

"The FPC continues to judge that banks are resilient, even if conditions were to be worse than forecast," BoE Governor Andrew Bailey wrote in a letter to finance minister Jeremy Hunt accompanying the report.

The FPC also announced it would conduct its first "stress test" of the non-banking sector following a near meltdown in pension funds in September.

SLOWING HOUSING MARKET

Britain's housing market is already starting to slow in the face of higher interest rates and an incipient recession. The BoE has raised rates to 3% from 0.1% a year ago, and economists polled by Reuters expect it to raise rates to 3.5% on Thursday.

Mortgage lender Halifax reported the biggest monthly house price fall since 2008 in November, and trade body UK Finance forecast on Monday that lending for house purchase would fall by almost a quarter next year.

Small landlords who had bought investment properties to rent out - who own 8% of Britain's homes - were likely to be harder hit than homeowners by rising rates, as they often had interest-only mortgages, the BoE said.

Landlords would need to raise rents by around 20% to recoup higher interest costs - which in turn might cause their tenants to default on other debt or cut consumption sharply, amplifying the economic downturn. Others might sell up, the BoE said.

Last month the government's Office for Budget Responsibility forecast that house prices would fall 9% by late 2024.

The BoE also warned of an increased danger of global financial risks crystallising.

"Sharp increases in prices, including of energy, tighter financial conditions and the worsening outlook for growth and unemployment will continue to weigh on debt affordability for households, businesses and governments globally," the BoE said.

The central bank warned in particular of the dangers of investing in crypto assets, which it said would benefit from "enhanced regulatory and law enforcement frameworks".

"Financial institutions and investors should take an especially cautious and prudent approach to any adoption of these assets until the necessary regulatory frameworks are in place," it said.

The BoE judged the risk of a sharp loss of investor appetite for British assets such as government bonds as "low", as turmoil had eased since September's mini-budget from Liz Truss's short-lived government.

"Perceptions of the UK macroeconomic policy framework can have a material impact on UK financial conditions," it said.

($1 = 0.8141 pounds)
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