The economic outlook has “deteriorated materially” from pressures including the Russian invasion of Ukraine, the Bank of England has warned, but UK banks have capacity to weather global uncertainty.
The BoE’s financial stability update on Tuesday came as UK inflation has hit a 40-year high of 9.1 per cent, heightening fears that households and businesses will struggle to make good on their debts.
Households with the lowest income, which spend the largest proportion on tax and essential items, would find it hardest to adjust spending in response to rising prices. However, the BoE said that they represented a smaller share of total debt, reflecting a more limited impact on financial stability.
Businesses with higher exposure to energy and fuel prices such as manufacturing and transport could face higher costs, even as falling household real incomes damp demand for discretionary spending.
In the medium term, the BoE predicts that this slowing demand will lead to a rise in unemployment.
The BoE said UK banks had capacity to support lending to households and businesses as a result of their strong capital and liquidity positions.
However, the central bank said that there were “tentative signs” of tightening credit conditions, and that overly stringent lending requirements could end up hurting creditworthy businesses and households.