Study Shows Bank of England’s Rising Interest Rates Threaten 1.2 Million UK Households With Insolvency

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The Bank of England made an impactful move last Thursday, June 22, 2023, as it raised the benchmark bank rate to 5%, marking a significant 0.5 percentage point increase. This decision catapults the central bank’s rate to its highest level since 2008 and represents the most substantial surge in three months. Coinciding with this development, the National Institute of Economic and Social Research (NIESR) published a study on the same day, asserting that the escalated interest rates would translate into elevated mortgage payments, potentially pushing 1.2 million households in the U.K. towards insolvency in 2023.

Bank of England’s Interest Rate Hikes Endanger 1.2 Million UK Households’ Financial Stability, NIESR Researchers Say

In a noteworthy announcement on Thursday, the Bank of England (BOE) unveiled its decision to increase the key bank rate by 0.5%, propelling it to a solid 5%. Shedding light on the rationale behind this move, the BOE articulated in a blog post that inflation in the United Kingdom had reached a level deemed “too high.” With the annual rate hovering just below 9%, the central bank is steadfast in its objective to attain a 2% inflation rate. The BOE’s blog post divulges, “If you have a mortgage or loan, that means your payments may go up.”

Following the upward adjustment of the benchmark bank rate by the BOE, the release of a study by the National Institute of Economic and Social Research (NIESR) shed light on a disconcerting outcome: higher interest rates are poised to plunge millions of Britons into the depths of insolvency.

NIESR economist Max Mosley articulately expressed this concern, stating, “The rise in interest rates to 5% will push millions of households with mortgages towards the brink of insolvency.” Mosley further emphasized that it would be unrealistic for the government to anticipate U.K. households to weather these jolts to their financial stability.

The NIESR economist said:

No lender would expect a household to withstand a shock of this magnitude, so the Government shouldn’t either. Some investment should be done in forbearance agreements, giving households and lenders the ability to create payment plans that work for each other.

Amidst the Bank of England experiencing its most rapid rate increase since gaining independence in 1997, the NIESR research resolutely underscores the far-reaching impact that millions of households are poised to endure. Startlingly, the researchers assert that a substantial portion of the population will bear the brunt of this economic upheaval, with their hard-earned savings at risk of vanishing into thin air. Notably, residents from Wales and the North-East are anticipated to face a disproportionately heavy burden in this unfolding scenario. “6% of households are projected to be insolvent by the end of the year as a direct result of rising mortgage repayments,” NIESR detailed.

The BOE’s blog post on June 22 highlights an important distinction for debtors: those who opt for a fixed rate “won’t see any change until the end of [the] fixed period.” However, the central bank cautions that individuals with loans or mortgages tied to variable interest rates “might find that the cost of your repayments goes up.” Recent data from U.K. Finance in December 2022 reveals that approximately 17% (equivalent to 1.4 million) of the outstanding mortgages in the U.K. operate on variable rates.

How do you think the Bank of England’s interest rate hikes will impact the overall economy and the financial well-being of households in the U.K.? Share your thoughts and opinions about this subject in the comments section below.