The British pound reached a new 15-month high on Wednesday following the Bank of England’s stress test, which demonstrated that the largest UK banks have sufficient capital to withstand a potential economic crisis. This outcome has increased expectations of further interest rate hikes by the Bank of England.
The stress test assessed the resilience of the eight biggest British banks to theoretical shocks, including a scenario more severe than the global financial turmoil of 2008. The results indicated that these banks are well-equipped to handle such situations. The test also evaluated the banks’ ability to manage a global increase in interest rates.
Bank of England Governor Andrew Bailey acknowledged the strength of the UK economy and financial system in the face of interest rate risk, although he cautioned that the full impact of higher interest rates is yet to be fully realised.
Last month, the Bank of England raised interest rates to 5% in an effort to control persistent inflation. However, concerns have emerged regarding the potential negative consequences for households, businesses, and the overall financial sector, which could potentially lead to a recession.
The stress test results, combined with positive UK wage growth data, have fueled expectations of further rate hikes by the Bank of England. Wage growth in the three months leading up to May reached its joint fastest pace on record, indicating some cooling of inflationary pressures in the labor market.
Bailey noted that while the jobs data suggests a cooling labor market, wage growth remains higher than desired by the Bank of England.
As a result of these developments, the British pound rose to $1.2970, its highest level since April 2022. Against the euro, sterling was down slightly at 85.28 pence, following its strongest performance since August 2022 achieved on Tuesday.
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