Five million more households yet to feel full rate hike burden, Bank of England warns
The Bank of England has said that UK households and businesses have been “resilient” in the face of rising interest rates – but repeated previous warnings that the full effect of higher interest rates was yet to come through.
Unveiling its latest Financial Stability Report – which is published twice yearly – the Bank said that household finances remained “stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments.”
The Bank, which raised its main policy rate 14 consecutive times between December 2021 and August this year to the current 15-year high of 5.25%, said that, because most mortgages taken out over recent years had been at a fixed interest rate, higher interest rates tended to have a lagged effect on households with a mortgage.
It said that around 55% of mortgage borrower accounts, around five million, had repriced since interest rates began to rise in late 2021.
But it warned: “Higher rates are expected to affect around five million [further] households by 2026.
“For the typical owner-occupier mortgagor rolling off a fixed rate between [April to June] 2023 and the end of 2026, their monthly mortgage repayments are projected to increase by around £240, or around 39%.
“As higher mortgage rates continue to flow through to UK households, the average debt servicing burden will increase.”
The report noted that, although average quoted mortgage rates had come down since the Bank’s last Financial Stability Report in July this year, they remained “higher than in the recent past”.
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People are waiting for mortgage rates to drop
Andrew Bailey, the governor, emphasised that the UK banking sector remained well capitalised and had come through the Bank’s recent stress tests well.
He added: “If economic and financial conditions were to materially worsen for households and businesses, our banking sector has the capacity to support them.”
He said that there was evidence that net interest margins (the spread between what banks charge borrowers and pay depositors and a key driver of bank profits) had peaked.
The governor highlighted that, “thank goodness”, despite higher mortgage costs there had not been a big increase in home repossessions as in the past.
He added: “The financial system is much better placed to support borrowers. It’s a benefit of financial stability that the system is able to take these actions. And that’s a good thing, a very good thing.”
Mr Bailey said that, while UK households and businesses had remained resilient in the face of higher borrowing costs, the Bank had noticed an increase in arrears among home owners – both those living in their own homes with a mortgage and among buy-to-let landlords.
He said that the Bank was “very alert” to the issue of renters and particularly in view of the fact that, with home ownership in decline, renters now formed a larger proportion of the population and also tended to be at the lower end of the income scale.
He went on: “There is obviously a financial stability lens on this and it comes through the buy-to-let market.”
Asked about the way in which some borrowers were responding to higher mortgage rates Sarah Breedon, the deputy governor responsible for financial stability, said the Bank had noted an increased uptake, over time, of long-dated mortgages of up to 35 years and particularly among younger borrowers.
She added: “The more important thing is lending into retirement when people might not have the income [to cover mortgage payments]. We don’t judge it as a financial stability risk but it is something we are watching.”
Mr Bailey said that, among corporates, there was also evidence of some arrears building up and in particular among small and medium sized businesses.
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How is the mortgage crisis affecting you?
But the report noted that the share of corporates at higher risk had fallen from its pandemic peak and pointed out that the bulk of UK corporate debt on fixed rates was due to mature in or after 2025.
The governor added: “We judge that the UK corporate sector as a whole has remained resilient.”
Further afield, Mr Bailey said that the overall risk environment remained challenging, singling out the Chinese economy – where many parts of the property sector remain under strain – as a particular risk for the global economy. He added that the “tragic events in the Middle East” had also contributed to geopolitical uncertainty.
The governor also sounded a warning on vulnerabilities in so-called ‘non-bank’ finance – services such as loans and credit which are not provided by banks but by other institutions, such as insurers, venture capital firms and currency exchanges.
In particular, he highlighted market-based finance – the provision of types of corporate credit, such as high-yield bonds and leveraged loans – where he said risks remained significant and, in some cases, had increased since the Bank’s last report in July.
He added: “There are now larger imbalances in the market in derivatives for US government debt – a key instrument in the financial system.”
The governor said that this could contribute to market volatility if hedge funds needed to unwind their positions in such instruments rapidly and noted that sharp movements in the prices of such assets could lead to wider dislocations as was shown during the LDI crisis which followed Kwasi Kwarteng’s mini-Budget in September last year.
The report also revealed that, since July, the Bank’s financial policy committee had been briefed on the continued adoption of artificial intelligence and machine learning in financial services and their potential financial stability implications.
Mr Bailey said: “I don’t pretend to be an expert on AI, because I am not, but when I speak to people who are they make the point [on] the complexity of the code behind it and the extent to which it is understood.
“It obviously has tremendous potential and particularly to improve productivity which would be a welcome thing.”
The governor also paid tribute to Alistair Darling, the former Chancellor, who died last week. He said Lord Darling was “wise, kind and had an absolutely wicked sense of humour.”
The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.
A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).
Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.
It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.
A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.
This was borne out by other figures released by the ONS on Friday.
Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.
Overall, there was a “large rise in goods imports and a fall in goods exports”.
A ‘disappointing’ but mixed picture
It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.
“I am determined to kickstart economic growth and deliver on that promise”, she added.
But the picture was not all bad.
Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.
It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.
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The expansion in March means the economy still grew when the three months are looked at together.
While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.
Such a cut would bring down the rate to 4% and make borrowing cheaper.
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Is Britain going bankrupt?
Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.
“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.
Why did the economy shrink?
The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.
The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.
It made up for a “very weak” month for retailers, the ONS said.
Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.
However, the picture emerging a year since the election of the Labour government is not hugely comforting.
This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.
Output shrank in May by 0.1%. That followed a 0.3% drop in April.
Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.
Hangover from artificial growth
However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.
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In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.
Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.
Signs of recovery
Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.
“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.
Meanwhile, the services sector eked out growth of 0.1%.
A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.
Struggles ahead
It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.
The economy remains fragile, and there are risks and traps lurking around the corner.
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Is Britain going bankrupt?
Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.
Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.
Business
Government to announce new scheme as it ramps up AI adoption with backing from Facebook owner Meta
The government is speeding up its adoption of AI to try and encourage economic growth – with backing from Facebook parent Meta.
It will today announce a $1m (£740,000) scheme to hire up to 10 AI “experts” to help with the adoption of the technology.
Sir Keir Starmer has spoken repeatedly about wanting to use the developing technology as part of his “plan for change” to improve the UK – with claims it could produce tens of billions in savings and efficiencies.
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The government is hoping the new hires could help with problems like translating classified documents en masse, speeding up planning applications or help with emergency responses when power or internet outages occur.
The funding for the roles is coming from Meta, through the Alan Turing Institute. Adverts will go live next week, with the new fellowships expected to start at the beginning of 2026.
Technology Secretary Peter Kyle said: “This fellowship is the best of AI in action – open, practical, and built for public good. It’s about delivery, not just ideas – creating real tools that help government work better for people.”
He added: “The fellowship will help scale that kind of impact across government, and develop sovereign capabilities where the UK must lead, like national security and critical infrastructure.”
The projects will all be based on open source models, meaning there will be a minimal cost for the government when it comes to licensing.
Meta describes its own AI model, Llama, as open source, although there are questions around whether it truly qualifies for that title due to parts of its code base not being published.
The owner of Facebook has also sponsored several studies into the benefits of government adopting more open source AI tools.
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Minister reveals how AI could improve public services
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Mr Kyle’s Department for Science and Technology has been working on its mission to increase the uptake of AI within government, including through the artificial intelligence “incubator”, under which these fellowships will fall.
The secretary of state has pointed to the success of Caddy – a tool that helps call centre workers search for answers in official documents faster – and its expanding use across government as an example of an AI success story.
He said the tool, developed with Citizens Advice, shows how AI can “boost productivity, improve decision-making, and support frontline staff”. A trial suggested it could cut waiting times for calls in half.
My Kyle also recently announced a deal with Google to provide tech support to government and assist with modernisation of data.
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Joel Kaplan, the chief global affairs officer from Meta, said: “Open-source AI models are helping researchers and developers make major scientific and medical breakthroughs, and they have the potential to transform the delivery of public services too.
“This partnership with ATI will help the government access some of the brightest minds and the technology they need to solve big challenges – and to do it openly and in the public interest.”
Jean Innes, the head of the Alan Turing Institute, said: “These fellowships will offer an innovative way to match AI experts with the real world challenges our public services are facing.”
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