Higher rates and inflation to put strain on UK households

The Bank of England said that UK households and businesses could feel under financial pressure due to tighter monetary policy and rising inflation. However, according to central bank officials, their incomes wouldn’t be so squeezed by high inflation as in the 2008 financial crisis.

The Bank of England previously reported that the UK was falling into a long recession. In addition, the country has been at risk of the biggest drop in living standards amid high inflation and a sharp increase in interest rates. 

According to the central bank report, households will face a prolonged squeeze on their finances due to the decline in real incomes, increases in mortgage costs and higher unemployment.

Approximately 4 million households will see their mortgage payments rise in 2023. The average payment will reach 1,000 pounds a month, up from 750 pounds, equivalent to about 17% of pre-tax income. 

Bank of England officials predict that 2.4% of households will struggle to make mortgage repayments. This is a smaller proportion compared to those recorded during the crisis in 2008 and the recession in the early 1990s, partly due to the fact that most homeowners are shielded by fixed-rate contracts. Moreover, they highlight that lending procedures are tightened with stricter standards.