Bank of England warns of more pain ahead for families amid squeeze on finances and the end of property price boom
- The Bank of England has warned the economy has ‘deteriorated materially’
- Inflation, at 9.1 per cent is set to surge above 11 per cent this year, a 40 year high
- Mortgage holders on fixed-rate deals, even protected loans, could face a shock
- Almost a third of small and medium businesses don’t have cash to last a week
In a gloomy update, the Bank said households were facing a serious squeeze on their finances – and warned of a wave of company collapses.
Inflation – already at a 40-year high of 9.1 per cent – is set to surge above 11 per cent this year.
The Bank said households were facing a serious squeeze on their finances – and warned of a wave of company collapses
As families struggle to afford the rising cost of essentials, the Bank also warned that the boom in property prices could be coming to an end.
Danni Hewson, a financial analyst at investment platform AJ Bell, said: ‘There’s a long, cold winter waiting in the wings.’
In its latest Financial Stability Report, the Bank said: ‘The economic outlook for the UK and globally has deteriorated materially. Following Russia’s illegal invasion of Ukraine, global inflationary pressures have intensified sharply.’ Energy prices have shot up as Western countries have shunned Russian oil and gas exports.
And food prices are also spiralling higher, as Russia and Ukraine are major exporters of essentials such as wheat and sunflower seeds used in cooking oil.
Now central banks around the world have been forced to hike interest rates in an attempt to encourage households and businesses to save rather than spend, in the hope this will bring prices down.
But it is also damaging the recovery from Covid, and several economists are now predicting the UK will plunge into a recession over the coming months.
The Bank of England said that there were a number of risks ahead, including developments in the Russia-Ukraine conflict, which could ‘adversely affect UK financial stability’.
So far, household debt in general relative to income has remained broadly flat.
The Bank said the pressures of rising costs and higher interest rates ‘are likely to lead to some business failures’
But the Bank thinks the worst is yet to come. It added: ‘The rise in living costs and interest rates will put increased pressure on UK household finances in coming months.’
Mortgage holders on fixed-rate deals, who are currently protected from rising interest rates, could face a shock when they next come to refinance.
And businesses which borrowed during the pandemic when lockdowns shuttered their stores are now having to repay those loans – at a time when costs are soaring, and interest rates are rising.
Energy prices have been pushed up by Russia’s invasion of Ukraine, and more recently by strikes in Norway.
This is proving difficult not only for households – who are set to be slapped with another hike to their bills when energy regulator Ofgem next reviews the price cap in October – but also for businesses.
Almost a third of small and medium-sized firms don’t have enough cash to last them a week, according to the Bank’s report.
But those smaller businesses account for around half of UK employment – jobs which could be lost if the firms struggle to keep their head above water.
There’s a long, cold winter waiting in the wings and one which can’t be hidden under bushels of tinsel and pretty lights
Mrs Hewson said: ‘Right now, the long, light days and warm temperatures are not only keeping energy costs down, they’re helping propel at least some additional footfall out onto high streets.
‘But there’s a long, cold winter waiting in the wings and one which can’t be hidden under bushels of tinsel and pretty lights, especially as tills are expected to run lighter.’ The Bank said the pressures of rising costs and higher interest rates ‘are likely to lead to some business failures’.
But high street lenders were well-prepared to weather an economic storm, the Bank added, as it encouraged them to keep lending to businesses and households where possible to keep the economy afloat.
Officials on Threadneedle Street even pushed ahead with plans to raise banks’ cash buffers, designed to be built up in good times in order to give lenders some leeway when a crisis hits.
The buffer requirement, which was slashed to zero during the pandemic to encourage banks to lend, will now be bumped up to 2 per cent of a bank’s assets.
But this is also a sign that the Bank of England is bolstering the UK’s defences in preparation for an economic storm.