The Bank of England's quarterly survey of bank liabilities shows that the cost of funding for UK banks continued to rise in the second quarter of 2026, reflecting the transmission of higher interest rates through the financial system and the gradual reduction in the stock of central bank reserves.
The survey, which collects data from the major UK banks on the composition and cost of their liabilities, is an important input into the Bank's assessment of financial conditions and the effectiveness of monetary policy transmission. The latest data show that the weighted average cost of bank funding rose by approximately 20 basis points during the quarter, continuing a trend that has been underway since the Bank began raising interest rates in 2022.
The increase in funding costs has been passed through to lending rates, with the average rate on new mortgages rising to 5.4 percent and the average rate on new business loans rising to 6.8 percent. The survey also shows that banks have been lengthening the maturity of their funding, a development that the Bank describes as positive for financial stability because it reduces the risk that banks will face a sudden withdrawal of funding.
The survey provides evidence that the transmission of monetary policy is working broadly as expected, with higher policy rates leading to higher funding costs and, in turn, to tighter credit conditions. But the transmission is gradual, and the full effects of the tightening that has already occurred will not be felt in the real economy for some time.
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