The Bank of England has told lenders to prepare for a “deteriorated economic outlook” and predicted that increases in house prices would slow down later this year.
Banks were told to ramp up capital buffers to ensure they can weather the storm.
“The economic outlook for the UK and globally has deteriorated materially,” the Bank said as it published its latest Financial Stability Report.
The Bank said the outlook for the economy is “very uncertain”.
“The Russian invasion of Ukraine could cause more disruption to global energy and food markets,” it said.
Despite warnings from the International Monetary Fund and OECD that Britain is more susceptible to recession and persistently high inflation than other Western countries, the Bank said UK lenders were well-placed to weather even a severe economic downturn.
The Bank said they still had strong capital ratios but they were expected to decline slightly in the coming quarters.
To help banks ensure they have the resilience needed, an increase in their countercyclical capital buffer rate (CCyB) was confirmed from 1% to 2% from July 2023.