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Bank of England posits 35% house price decline in stress test

[LONDON] The Bank of England set out the scenario it will use to assess the resilience of the UK banking system in the coming years, including a 35 per cent decline in house prices between the end of this year and the second quarter of 2018.

The test foresees a slide into recession lasting until the end of June 2017, with unemployment rising to as much as 11 per cent by the second quarter of 2018. Interest rates jump to 4.2 per cent at the end of the period, as annual inflation reaches 5.6 per cent the next year and falls back to 5 per cent two years later.

"We're not just interested in whether banks stay afloat," Alex Brazier, executive director for financial stability, said in a speech about the BOE's stress testing approach at the London School of Economics Oct 30. "We want the system to be strong enough to continue to serve the real economy, even in the storm."

The BOE's "anchor scenario" applies to the entire UK banking system. It doesn't include international developments such as the 65 per cent plunge in the Hang Seng Index and the 34 per cent collapse in Brent crude oil prices, which are included in a stress test applying only to the seven biggest banks and set out in May.