Bank of England warns that the economic outlook in the UK and around the globe has "deteriorated materially".
Worldwide, fuel and energy costs are increasing rapidly. This is pushing up the overall price of gasoline and other fuels.
The Bank stated that UK banks were able to weather any economic downturn.
The bank was instructed to save more money for rainy days to weather any storm.
In its most recent Financial Stability Report, the Bank made these comments.
According to international forecasters, such as the IMF or OECD, Britain is more vulnerable to recession and persistently higher inflation than other Western nations. All of these countries are dealing with shocks in the energy and commodity markets.
The Bank stated that the UK's banking system was well-positioned to handle a severe downturn. However, it suggested that banks increase the amount they have set aside to absorb shocks. Banks will have to reserve 2% of their assets for buffer purposes starting in a year. This is an increase from the normal 1%.
According to the Financial Policy Committee, it may change the rate in one direction or the other depending on the performance of the global economy.
As fuel, energy and food prices rise, household finances have been under increased pressure.
Domestic energy bills rose after the average household's price cap was raised by 54% to PS1,971.
Experts think this could increase to about PS2,800 in October. This could push inflation higher than 11% later in the year.
The Bank stated that "commodity volatility following the Russian invasion in Ukraine has further exacerbated the price pressures facing households, businesses, and has had consequences for the financial system."
Some households may struggle to pay their debts. About 80% are on fixed interest rates. However, 40% of mortgages will be renewed this year or next. This could increase household debt.
The Bank stated that tighter financial conditions and lower real incomes would impact debt affordability in many countries. This will increase the risk of global debt vulnerability.
The Bank stated that financial institutions are resilient to the debt vulnerability of households and businesses, despite increased pressure on household budgets.
This speaks volumes about the bank system's resilience over the past 15 year. It appears to be able to withstand the largest economic contraction in 300-years over the pandemic.
At the moment, it's smaller firms and households that are more vulnerable than the financial sector.
According to the Financial Policy Committee, households' debts have not increased in response to the cost-of-living crisis. It also believes that the percentage of households that spend large amounts of their incomes servicing debts will continue to be manageable despite rising interest rates.
Its members are also sanguine about the impact on small businesses. They acknowledge that they may be affected by declining demand from households with decreasing real incomes but predict that it will "take large increases to borrowing costs" to affect their ability to service debts.
Let's all hope that the optimism of this committee is not misplaced.
