Lenders’ annual stress to start in September

Yesterday (5 July) the BoE said the economy had “deteriorated materially” in recent months after Russia’s invasion of Ukraine stoked inflation, which in turn fuels a cost of living crisis, but it said there were already “tentative signs” British lenders were becoming more cautious. 

According to The Times, it however indicated borrowing costs would have to rise markedly higher before those with mortgages struggled to cope with its deputy governor Sir Jon Cunliffe saying the base rate would need to rise to between five percent and eight percent. 

It said it believed the financial sector was in a position to “weather the impact of serve economic outcomes”. Despite this, it told lenders to boost their rainy day capital cushions by £11bn to help withstand economic turmoil. 

The increase in the so-called countercyclical capital buffer from one percent to two percent will take effect next July. 

The BoE has also confirmed the annual stress on the biggest lenders would start in September. It will look at lenders’ resilience to recession and comes amid fears the UK is sliding toward a downturn. 

Additionally, its financial stability report found a high proportion of borrowers on fixed-rate mortgages is cushioning the impact of rate rises on homeowners. The BoE said 80% of the outstanding value of home loans were fixed terms in the first quarter of the year - up from 55% five years ago. 

According to The Times another deputy governor, Sam Woods, said the BoE had a “completely open mind” about the possibility of 50-year mortgages - which the government is considering to help people onto the property ladder. 

The BoE believes the fallout of these higher rates and a slowing economy would not be felt evenly by businesses, with those companies with big exposure to rising energy and fuel costs at risk of “significant cost pressure”.