By Joice Alves
LONDON (Reuters) - Sterling touched a fresh 15-month high on Wednesday after a Bank of England (BoE) banking system stress test showed Britain's largest lenders have enough capital to ride out a potential economic crisis, firming bets for more BoE rate hikes ahead.
The test showed Britain's eight biggest banks had enough capital to weather theoretical shocks under a scenario which the BoE said was more severe than the global financial turmoil of 2008 when British taxpayers had to bail out several lenders.
The test also measured how well the lenders would cope with a global rise in interest rates.
"The UK economy and financial system have so far been resilient to interest rate risk," BoE Governor Andrew Bailey said, though he noted the full impact of higher interest rates had yet to be felt.
The Bank last month raised rates to 5% as it tries to tame stubborn inflation, but the surging cost of borrowing has raised concerns about a hit to households, businesses and the broader financial sector that could push the economy into a recession.
"Headlines suggest large banks have passed stress tests while smaller lenders and shadow banks remain a concern, though UK households with high debt will remain below their peak of 2007. At first glance, there seems nothing here to urgently constrain the BoE's monetary tightening plans," said Chris Turner, head of markets at ING.
Money markets are pricing in that the BoE's benchmark rate will peak at 6.3% in March 2024.
The stress test result added to UK wage growth data on Tuesday which fed expectations the BoE has further to go in raising rates.
A key measure of British wages rose in the three months to May at the joint fastest pace on record, but there were signs that the inflationary heat in the labour market was cooling.
Bailey said on Wednesday that the latest jobs data pointed to signs of a cooling labour market, even if wage growth remains too high for the BoE's liking.
The pound rose as high as $1.2970, its highest since April 2022, and was last trading just shy of that level, flat on the day at $1.2923.
Against the euro, sterling was down 0.2% at 85.28 pence, after hitting on Tuesday its strongest since August 2022.