The pound has risen to its highest level since the leadership crisis surrounding former Prime Minister Boris Johnson in June. Shares in the United States and sterling jumped after US inflation fell faster than expected in November. The leap has bolstered the case for the Federal Reserve to slow the pace of interest rate hikes.
The pound at 2pm today (December 13) was 1.2409 dollars compared to 1.2284 dollars at the previous close.
US inflation slowed again last month in the latest sign price increases are cooling despite the pressures they continue to inflict on households.
The US Government said earlier today consumer prices rose 7.1 percent in November from a year ago.
This was a sharp drop from 7.7 percent in October and a recent peak of 9.1 percent in June. It also marks the fifth straight slowdown.
Meanwhile in London, the FTSE 100 index at 2:45pm was up 95.19 at 7541.16.
News of sterling’s gains comes as the Bank of England warns about four million mortgage borrowers are set to see their monthly payments jump at the end of 2023 as the risk of households defaulting on debt rises.
People with a fixed-rate home loan due to expire at the end of next year are facing average monthly repayment increases of about £250 as they are forced to refinance onto a higher rate.
This is based on market interest rates at the end of November, with the Bank’s base rate set at three percent and set to rise again on Thursday. This could mean that costs surge by £3,000 a year for many households, which are already seeing their finances stretched by soaring prices across the board.
The Bank’s Financial Policy Committee (FPC) said, however, that the increased pressure on households is not expected to challenge the resilience of UK banks which will be well equipped to support lending.
It said this is because big banks and building societies have strong balance sheets, higher profits and have increased their provisions to support credit losses.
The FPC said in its financial stability report: “Major UK banks’ and building societies’ capital and liquidity positions remain strong and pre-provision profitability has increased.
“They are therefore well placed to absorb shocks and continue meeting the credit needs of households and businesses.”
Furthermore, the FPC judged that households are more resilient now than in the run-up to the financial crisis in 2007 and the recession in the early 1990s.
People have, on aggregate, less debt compared with the peak which preceded the financial crash and while the proportion of disposable income spent on mortgages in aggregate is projected to rise, it will remain below the peak levels seen.
The Governor of the Bank of England, Andrew Bailey, added that he believes there will be fewer home repossessions than seen in previous financial crises due to greater support from lenders.
He said: “Banks are now required by regulation to support their customers through these problems more than they did in the past.
“There is a second part to that, as a more financially robust banking system will be better placed to do that, to support those customers.
“I do hope and believe that more customers will be supported through this and we won’t get the level of repossessions, and therefore the level of loan losses, that went on in the past.”
However, the report found that the number of people falling into arrears is set to rise next year.
The FPC said: “Nevertheless, many households will find it challenging to manage higher interest rates alongside the ongoing rises in the cost of essentials, and pressure on UK households will increase. As household debt-servicing burdens continue to rise over the next year, arrears and defaults are likely to rise.”
The FPC stress-tests major banks to check how well they can withstand economic shocks and deteriorating conditions.
The results of the latest test are due to be published in the summer of 2023 and will help inform banks’ cash buffers.