Full Impact of Interest Rates to Come Despite UK Economic Resilience, Claims New Bank of England Report

The Bank of England has stated that despite the resilience of the UK economy, the effects of interest rates have still not been fully realised, according to the latest Financial Stability Report.

The Bank of England cautioned today that although the UK economy has successfully navigated the wave of a rapid interest rate tightening cycle this year, the complete impact of these hikes has yet to reach smaller and highly-leveraged businesses.

The risk posed by the so-called shadow banking sector to the UK economy has increased this year, despite traditional UK lenders seemingly overcoming the worst of economic challenges.

The Financial Conduct Authority has implemented measures to enhance liquidity and address the vulnerability of money market funds. However, the Bank indicates that riskier borrowing in financial markets, such as private credit and leveraged lending, is still deemed "particularly vulnerable."

Khalid Talukder, Co-Founder of DKK Partners, commented: “It’s good to see the Bank of England’s confidence towards the economy given the turbulence we’ve experienced in recent times. However, the warning of the uneven impact of financing costs on smaller or highly leveraged businesses and impending interest rate rises emphasises that businesses must remain resilient before a true upturn comes.

In light of the ongoing risks, government and industry collaboration will be key in navigating this evolving landscape. Policymakers should focus on tailored support for vulnerable sectors and business support, addressing potential strains highlighted by the Bank of England. This collaborative effort is essential for fostering a resilient but also inclusive economic rebound that ensures the stability and growth of businesses who are the beating heart of the UK economy".

The traditional banking sector is well-capitalised with high levels of liquidity, and it has weathered volatility, even in the wake of the collapse of Silicon Valley Bank and Credit Suisse earlier in the year.