Britain's economic outlook has "deteriorated materially” thanks to soaring prices stoked by Russia's invasion of Ukraine, the Bank of England has said.

In its latest health check on the UK financial system, the Bank noted sharp spikes in the price of gas and other commodities.

This will put households under more strain and leave them more exposed to further shocks in the coming months, the Bank said.

UK lenders will be ordered to hold an extra £22bn of capital as a buffer against economic shocks from July next year, the Bank said on Wednesday.

“The economic outlook for the UK and globally has deteriorated materially,” the BoE said in its latest Financial Stability Report.

“Prices of essential goods such as food and energy have risen sharply in the UK and globally, and the outlook for growth has worsened. This is largely a result of Russia’s illegal invasion of Ukraine.

“These higher prices, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt. Given this, we expect households and businesses to become more stretched over coming months. They will also be more vulnerable to further shocks.”

Bank of England governor Andrew Bailey told reporters that financial assistance from the government would play a "buffering and protecting" role to help cushion households from higher prices.

He also pointed out that, while interest rates are rising, significant numbers of homeowners have switched in recent years from variable to fixed-rate mortages, meaning that they were not immediately exposed to higher repayments.

About 80 per cent of UK mortgages are on fixed rate deals, and despite 40 per cent needing to be refinanced over the next 18 months, mortgage payers were in a good position to afford increased payments.

Volatile prices have also put extra pressure on financial firms but the Bank said it believed the wider system was not as risk.

Mr Bailey said banks would be able to cushion economic shocks much more substantial than the ones they currently face.

Despite this, officials have ordered them to set aside an additional £22bn of capital as a buffer from next July

The buffer - introduced in the wake of the financial crisis to ensure banks have a rainy day fund - was slashed to zero during the pandemic, releasing billions of pounds to help businesses and households.

The Bank of England announced last December that it would be increased to 1 per cent as conditions normalised. It will now rise to 2 per cent after the mandatory 12-month notice to banks.

Officials stressed that they are ready to release the cash again, especially if the economy performs worse than currently expected.

"Although downside risks will present headwinds, the FPC judges that UK banks have capacity to weather the impact of severe economic outcomes," it said.

But it would lead to less money flowing to borrowers, officials said in Tuesday's report.

“The outlook is subject to considerable uncertainty and there are a number of downside risks that could adversely affect UK financial stability,” the BoE said.