The Bank of England has said that banks in the UK must start to set aside more money to help absorb the impact of economic shocks.
Starting from July 2023, banks will be required to set aside equivalent to two per cent of their assets as a buffer, with the current rate set at one per cent.
The Bank of England’s change of advice comes amid the release of its latest Financial Stability Report, in which it acknowledges that the economic outlook for the UK and across the globe has “deteriorated materially” in the wake of rampant inflation.
However, the Bank of England insisted that the UK banking system can withstand a severe economic downturn should one come to pass.
The Bank’s optimism comes in spite of the fact that the International Monetary Fund [IMF] and Organisation for Economic Co-Operation and Development [OECD] have suggested that the UK is more prone to recession and higher, more consistent inflation than other Western nations.
The inflation which has led to the worsening economic situation has been fuelled by rising energy, fuel and food costs.
After wholesale gas and electricity prices increased drastically last year, the energy price cap set by sector regulator Ofgem was increased in April 2022 by 54 per cent, which saw the average household bill rise to £1,971 per year. It is also expected that the cap could be increased again in October 2022, which could see inflation as a whole exceed 11 per cent before the end of the year.
Prices have also been influenced by the impact of Russia’s invasion of Ukraine, which have seen costs of fuel and food climb further upward.
The Bank of England said in its report: “Commodity price volatility following the Russian invasion of Ukraine has further exacerbated price pressures facing households and businesses, and has had implications for the financial system.”
Having been forced to increase interest rates in a bid to cool rising prices, there are also concerns within the Bank of England that British households could begin to struggle with debt, even though financial institutions were robust enough to deal with the knock-on effect.
It said: “Tighter financial conditions and reduced real incomes will weigh on debt affordability for households, businesses and governments in many countries, increasing the risks from global debt vulnerabilities.”
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