Full impact of higher interest rates yet to be felt - BoE

The Bank of England warned on Wednesday that the risk environment remained "challenging", with both businesses and households yet to feel the full impact of higher interest rates.

Publishing its latest Financial Stability Report, the BoE’s Financial Policy Committee said subdued economic activity and increased geopolitical tensions made for a "challenging" outlook.

In particular, it noted that the full effect of higher interest rates - which are now around pre-2008 levels in both the UK and US, following a series of rises - "has yet to come through, posing challenges to households, businesses and governments".

It acknowledged that interest rates in the UK, eurozone and US were now at or near peaks.

But it warned: "Central banks have emphasised that they expect rates will need to remain at these levels for an extended period, in order to continue to address inflationary pressures."

The quarterly report also noted that while there were currently "few signs of stress" in riskier financial markets such as private credit and leveraged lending, "a worsening macroeconomic outlook…could cause sharp revaluations of credit risk".

It also flagged the crisis-hit Chinese property sector as a cause for concern. "Significant downside risks remain," the committee noted. "This could lead to broader stresses in other sectors of the mainland Chinese economy."

Speaking after the report’s release, governor Andrew Bailey reiterated that rates would likely to need to remain at their current levels "for an extended period" to bring inflation back to target.

UK interest rates now stand at 5.25% after the Monetary Policy Committee raised the cost of borrowing 14 times since December 2021, as it looked to tackle soaring inflation. That now stands at 4.6%, off last year’s high of 11.1%, but still well above the BoE’s 2% target.

Bailey added that the outlook for inflation remained uncertain.