MNI: BOE Sees Stability Risks From High-For-Long Market Rates

The Bank of England Financial Policy Committee warned that with financial markets pricing in high-for-long interest rates the risk environment was "challenging," with much of the impact of rate increases still to feed through for both households and corporates.

At its meeting ending Oct 5 the FPC noted that risk-free interest rates in advanced economies had risen since the summer and higher rates were weighing on the ability of households and businesses to service and refinance debts and some asset valuations, such as US equities, were looking stretched, raising the risk of a sharp fall in prices.

Against this backdrop the FPC announced that bank stress tests next year would focus on a range of scenarios, including rates staying high-for-long whereas previously high interest rates tests had been based on a high peak followed by a gradual decline.

The FPC said "some parts of the global banking system and financial markets remain vulnerable to stress from increased interest rates."

TRANSMISSION

The Bank's rate hikes will take longer to feed through in this cycle given the higher proportion of fixed rate loans. The BOE estimated that some 80 percent of corporates had fixed rate, fixed term borrowing -- the bulk due to reprice in 2025 -- and that around half of household fixed rate mortgages had been refinanced so far.

The FPC also updated the extensive work that the Bank is carrying out on non-bank finance, which now accounts for the vast majority of the change in UK lending. It is recommending that sterling based money market funds hold half their assets in short-term instruments.

The FPC also announced it was leaving the countercyclical capital buffer unchanged at 2%.