Bank of England Agents Report Uneven UK Recovery as Pay Settlements Hold at 3.6% and Credit Supply O

Key Takeaways

• The Bank of England's September 2026 Agents' summary of business conditions describes an uneven UK economy.
• Output and confidence have improved in select sectors, but construction, property, and consumer spending remain weak.
• This is not a rule change, but it gives compliance and risk teams useful context for credit risk, conduct, and operational resilience planning, particularly given rising household strain, tighter lending competition, and persistent input cost pressures.

Deep Dive

The Bank of England's September 2026 Agents' summary of business conditions describes an uneven UK economy. Output and confidence have improved in select sectors, but construction, property, and consumer spending remain weak. This is not a rule change, but it gives compliance and risk teams useful context for credit risk, conduct, and operational resilience planning, particularly given rising household strain, tighter lending competition, and persistent input cost pressures.

Several findings bear directly on risk. Credit supply continues to outstrip demand across all firm sizes, and Tier 1 lenders are competing mainly on price, which pressures lending margins. Banks prefer larger, existing clients and show less appetite for smaller firms, construction and hospitality firms with weak track records, and firms exposed to AI-driven revenue erosion. Distressed loan levels are low, but clients are prioritizing margin protection over growth. Early refinancing activity is rising as lenders compete for new customers. The risk is that competitive pressure erodes underwriting discipline, so credit policy exceptions and pricing-for-risk practices deserve scrutiny. Housing and commercial real estate have softened further, with transaction volumes down in some areas by double-digit percentages, higher mortgage rates weighing on affordability, and construction contraction possibly continuing. This raises collateral valuation and concentration risk for secured lending.

On the consumer side, outreach participants report that households are drawing down savings, turning to debt, and taking second jobs to cover everyday expenses. This is a vulnerability signal relevant to Consumer Duty obligations, forbearance and arrears handling, affordability assessments, and identification of vulnerable customers. Charities also report funding strain and some are considering mergers. Input costs remain elevated, with double-digit increases in plastics, fertilizer, and some metals, and firms may pass further costs into prices in 2027. Food inflation expectations have eased toward 4% by year-end, though hot weather and El Niño present upside risks beyond 2026. Cost pass-through, hedges expiring, and contract renewals may create pricing and fair-value considerations for customer-facing products.

Labor market findings matter for workforce and operational planning. The average 2026 pay settlement is 3.6%, up from 3.5%, and is unlikely to move much. The 2027 settlements are expected to be similar to or slightly lower. Few firms are aware of the Low Pay Commission's early estimate of a 3.7% National Living Wage increase for 2027, which many cite as a key uncertainty. Headcount is expected to be flat, AI is influencing role design, and firms favor experienced hires. Trade findings point to supply chain resilience but unpredictable supply of some chemicals and fuels, plus US tariffs, carbon regulation, and Middle East conflict exposure. These are relevant to third-party and concentration risk reviews.

Recommended actions: (1) refresh credit and collateral stress scenarios for commercial real estate, housebuilding, construction, and hospitality; (2) review underwriting standards and exception tracking in light of margin competition; (3) reassess vulnerable customer indicators, affordability checks, and collections and forbearance readiness; (4) update inflation, wage, and energy cost assumptions in planning and budgeting for 2027; (5) review third-party exposure for supply-chain and energy-intensive providers; (6) monitor the 30 October 2026 update and harvest data for emerging food inflation effects.

Source: Bank of England