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LONDON: Britain’s economy is so far proving resilient to the jump in interest rates but it will take time for the full impact of the climb in borrowing costs to feed through, the Bank of England said on Wednesday.

The BoE has raised rates sharply, taking them to 5% last month from 0.1% at the end of 2021, raising concerns about a hit to households, businesses and the broader financial sector which could push the economy into a recession.

The BoE, in a half-yearly assessment of the health of the financial system, said there was no reason for alarm.

“The UK economy has so far been resilient to interest rate risk, though it will take time for the full impact of higher interest rates to come through,” it said.

The proportion of highly indebted households was rising, but even taking into account the higher cost of living, with inflation at nearly 9%, it was expected to remain below the peak seen in 2007, the BoE said.

On Tuesday, average interest rates for new two-year fixed-rate mortgages - the most common form of housing finance - rose above their peak following last September’s mini-budget to a 15-year high of 6.66%, according to data provider Moneyfacts.

Britain’s finance industry estimates 800,000 households will need to refinance on to more expensive mortgages in the second half of 2023, and a further 1.6 million in 2024.

British banks were less exposed to the adverse effects of higher interest rates than households were, especially compared with financial institutions in other countries, while the corporate sector remained “broadly resilient”, the BoE said.

“Nevertheless, higher financing costs are likely to put pressure on some smaller or highly leveraged firms,” it said. Britain’s eight largest lenders all had enough capital to cope with higher rates, the BoE announced following its annual ‘stress test’ of the sector.

Bank of England set to raise rates to 4.75% as inflation slow to fall

The BoE added that following the collapse of Silicon Valley Bank, it was working with Britain’s finance ministry to ensure that there were options to smoothly wind up small banks which were exempt from some requirements applying to larger ones.

BoE Governor Andrew Bailey will present the report’s findings in a press conference at 0800 GMT.

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