UK households and business are already under pressure from higher interest rates but they have been resilient so far and that the major UK banks would be able to maintain lending to the real economy even under a severe scenario of persistent inflation and rising global rates, the Bank of England's latest Financial Stability report finds.

The BOE's projected rise in UK household's average mortgage debt servicing ratio showed that the peak is set to be below the peaks seen in the mid 1990s and in the 2000s, with the ratio assumed to rise to 8.0% compared to 6.2% now. While costs for those on fixed interest rate mortgages who have to re-mortgage are set to rise sharply, the BOE stated that this would not be a risk to overall financial stability.

The results of the BOE's 2022/23 annual cyclical scenario stress test revealed that the major UK banks would be resilient even if there was persistently higher advanced economy inflation, rising global interest rates and deep simultaneous recessions. The BOE, however, noted that non-bank financial institutions were also exposed to higher interest rate risks and that more work was needed to strengthen their resilience.

In the severe stress scenario major banks Tier 1 capital falls to 10.8% from 14.2% with all banks passing the test, the BOE says.