UK resilient to rates: The Bank of England (BoE) reports that homeowners and businesses in the UK are showing resilience against elevated interest rates, with levels of problematic debt remaining notably lower than those observed in the aftermath of the 2008 financial crisis. 

The financial environment globally remains challenging, with particular concerns surrounding sectors like private equity. However, the BoE asserts that the UK's financial system is well insulated against potential future shocks.

UK borrower resilience

According to the BoE's Financial Policy Committee, UK borrowers have thus far demonstrated resilience in the face of increased interest rates. Despite maintaining its main interest rate at 5.25 per cent, the BoE hinted at the possibility of a rate cut, citing positive inflation trends. Financial markets anticipate a rate cut as soon as June, with a high probability assigned to such a move by August.

The BoE highlighted that slightly over half of households with mortgages have experienced an uptick in debt payments since the rate hikes commenced in December 2021. Projections indicate a gradual rise in mortgage debt service ratios, albeit remaining below previous forecasts. 

Additionally, the percentage of households facing significant debt burdens relative to their living expenses is expected to increase marginally but remains well below levels seen post the global financial crisis.

Mortgage duration concerns

However, the BoE cautioned against a growing trend of mortgages spanning 30-year terms, constituting nearly half of all new mortgages. It also noted instances of low-income households struggling with essentials such as food, despite not being in debt that poses broader financial stability risks.

While the UK economy experienced a shallow recession in the latter half of 2023, recent data suggests a return to growth, albeit modest, in 2024. Corporate insolvencies in England and Wales saw a notable increase in February compared to a year earlier, primarily affecting very small businesses. Nevertheless, the BoE maintains that corporates, overall, have shown resilience against high interest rates and sluggish growth.

(With Reuters Inputs)