The economic outlook for the UK and the rest of the world has “deteriorated materially”, the Bank of England has warned.
Energy and fuel costs are rising rapidly around the world, pushing up prices in general more quickly.
However, UK banks are in a position to weather even a severe economic downturn, the Bank said.
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It told banks to keep more money in rainy day funds to ensure they can weather any storm.
The Bank’s comments came in its latest Financial Stability Report.
International forecasters such as the IMF and OECD have said Britain is more susceptible to recession and persistently high inflation than other Western countries, all of which are grappling with energy and commodity market shocks.
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While the Bank said the UK’s banking sector was well-placed to cope with a severe downturn, it said banks must increase the amount of money they set aside to absorb shocks. Starting a year from now, banks will be required to set aside a sum equal to 2% of their assets as a buffer, as opposed to the normal 1%.
The Financial Policy Committee said it could vary the rate in either direction depending on how the global economy pans out.
Inflation hit
Households have come under increasing pressure in recent months, as energy, food and fuel prices soar.
In April, domestic energy bills jumped after the price cap was increased by 54% to £1,971 for the average household.
Experts believe this could rise again in October, to around £2,800, which could help to push inflation up to more than 11% later this year.
“Commodity price volatility following the Russian invasion of Ukraine has further exacerbated price pressures facing households and businesses, and has had implications for the financial system,” the Bank said.
Some households could struggle with debt. About 80% of mortgages are currently on fixed interest rates, but some 40% of these are set for renewal this year or next, which could push up costs for these households.
“Tighter financial conditions and reduced real incomes will weigh on debt affordability for households, businesses and governments in many countries, increasing the risks from global debt vulnerabilities,” the Bank said.
However, despite increasing pressure on household budgets, the Bank said financial institutions were resilient to debt vulnerabilities among households and businesses.
