the Bank of England is concerned about possible payment defaults by the British

Will payment defaults increase across the Channel? This is one of the concerns of the Bank of England (BoE) regarding the very long-term mortgages taken out by many British households in the face of rising interest rates. Which could have consequences for the financial stability of the country.

In the last quarter of 2023, almost half of new loans taken out in the United Kingdom were for a duration of 30 years or more, according to the quarterly report of the Financial Policy Committee (FPC) of the British bank published this Wednesday. However, high rates imply an increase in the cost of repaying real estate loans for individuals, which pushes them to spread out their payments over time, implying persistence of the debt.

This could make borrowers more sensitive to negative shocks » on their income, and “increases the risk of reduction of their consumption and defects » payment, according to the FPC. The share of UK households with a monthly repayment that is too high relative to their income is also expected to increase slightly to 1.6% by the end of the year, compared to 1.4% in the third quarter of 2023.

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14 consecutive rate hikes

Especially since last Thursday, the BoE once again maintained its interest rates at 5.25%, at the highest level since early 2008 and the financial crisis. And after 14 consecutive rate increases, the BoE predicts that the effect of these increases will only be fully felt by the British by… the end of 2026. In the meantime, it expects that the proportion of highly debt increases over the next year.

Restrictive monetary policy weighs on activity » economic, cools the labor market, and “ lowers inflationary pressures », noted the BoE at the end of March. However, she believes that “monetary policy must remain sufficiently restrictive for long enough in order to sustainably bring inflation back to the 2% target “.

Especially since inflation in the United Kingdom fell to 3.4% year-on-year in February, the lowest since September 2021 and in sharp decline since its peak of more than 11% at the end of 2022. However, it remains the highest in the G7.

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Towards a rate cut?

At the end of January, the Governor of the Bank of England, Andrew Bailey, nevertheless commented that “ Although the effects of rising interest rates have not yet fully manifested, borrowers overall have demonstrated resilience in the face of these changes “.

In the same vein, the FPC emphasizes that “ although UK household finances remain under pressure due to rising living costs and high interest rates, their outlook has improved since the last quarter of 2023 “.

What's more, like the Fed or the European Central Bank, the British monetary institution is also considering a future reduction in its rates. “We're not yet at the point where we can lower interest rates, but things are moving in the right direction », welcomed the governor of the BoE last week.

In recent weeks we have seen more encouraging signs that inflation is falling » in the United Kingdom, he clarified, adding that he had however “ need to be sure that this inflation drops to our target of 2% and stays there “.

Ahead of the BoE's decision to maintain its rates last week, the market was considering a first cut in June, noted Kathleen Brooks, analyst at XTB.

Geopolitical risks

Among the systemic risks weighing on financial stability in the United Kingdom, the monetary institution also notes the rise in geopolitical tensions or cyberattacks, according to the quarterly report of its Financial Policy Committee (FPC) published on Wednesday.

The general environment remains complicated ” and especially ” global risks ” And ” geopolitics have increased “, he wrote in his report.

Elections in many countries this year could also lead to market volatility », Remarks the FPC.

The committee also cites the “ high level of debt in major economies » or the fall in commercial real estate prices. The private sector, however, remains resilient to high interest rates and low growth “.

For its part, the British banking system also remains “well capitalized and able to support households and businesses even if economic and financial conditions deteriorate substantially “.

In its biannual survey on systemic risks, which questions financial players, the BoE also notes that the latter remain very concerned about the risks linked to geopolitical tensions, in particular between Russia and Ukraine and in the Middle East, and by those linked to computer attacks.

On this last point, the FPC announced the launch in the spring of a new stress test, on which more details are to come. As a reminder, since the financial crisis of 2008, central banks have imposed “ stress tests » to the largest banking establishments, which in theory make it possible to establish to what extent they would withstand major shocks, particularly financial ones.

(With AFP)