The Bank of England says that the British economy has so far been resilient to the large increase in interest rates over the past year and a half. However, it will take time for the full impact of higher rates to be felt.
The Bank increased interest rates to 5% last month from a low of 0.1% at the end of 2021. This has raised concerns about the impact on households, businesses and the wider financial sector. It could push the economy into a recession.
However, in its latest assessment of the health of the financial system, the Bank of England says there is no reason to panic yet. It said:
"The UK economy has so far been resilient to interest rate risk, though it will take time for the full impact of higher interest rates to come through."
The report acknowledges that more households are becoming highly indebted. However, even taking higher living costs into account, debt levels are likely to remain below the peak seen in 2007.
The Bank of England says that while UK banks are less exposed than households to the effects of higher rates, compared to financial institutions in other countries, higher financing costs are likely to pressure some small or highly leveraged firms.
In summary, the Bank sees the British economy and financial system coping so far but warns that the full blow from higher interest rates is yet to hit. It will monitor the situation closely for any risks or problems emerging.
