British Businesses Face £42bn Debt Crisis Post Ultra-Low Rates Era

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British businesses are bracing for a debt crisis as high interest rates are predicted to cost an additional £41.7 billion by the end of the decade.

With the expiration of cheap loans, borrowing costs are expected to surge, significantly impacting the economy.

According to consultancy Baringa, businesses will face an average annual increase of £4.7 billion in debt servicing costs following the Bank of England’s decision to end the era of ultra-low rates, raising borrowing costs to a 17-year high.

Economist and Baringa partner Nick Forrest highlighted the potential inflationary pressures as companies might be forced to raise prices to manage the increased costs, with some companies facing the prospect of collapse. Forrest remarked, “It’s tempting to look at plateauing or falling interest rates and conclude we’re coming out of the woods. Sadly, this disguises the truth that the hike in rates since the end of 2021 condemns business and the wider economy to a huge hangover for years to come.”

Baringa estimates that debts worth £1.6 trillion are set to refinance between 2024 and 2030. Since December 2021, the Bank of England has raised its base rate from 0.1% during the peak of the Covid pandemic to 5.25% to combat the cost of living crisis.

Despite hopes that inflation’s return towards the Bank’s 2% target would lead to rate cuts, persistent price rises in the services sector and an upcoming general election mean that analysts now expect borrowing cuts to begin later in the year.

Many businesses are likely to struggle, particularly as most finance directors have little experience managing borrowing costs at these levels. Forrest warned, “Ultimately, those companies and sectors that are highly leveraged, that took out debt when it was that much cheaper, and are facing other headwinds, will struggle, and I am sure there will be some businesses where this is the last straw on the camel’s back.”

Surviving companies are expected to pass on the increased borrowing costs to customers, with three-quarters of surveyed executives indicating plans to raise prices, further exacerbating inflationary pressures.

Economists at BNP Paribas, Europe’s second-largest bank, have cautioned that inflation will be higher and more volatile in the coming years due to factors such as deglobalisation, the transition to net zero, and increased geopolitical instability. Matthew Swannell, a BNP economist, stated, “The world is likely, all else equal, more inflationary. The consequence of that is that the neutral rate is higher because central banks will always work to keep inflation at 2%.”

Higher defence spending, with both Rishi Sunak and Keir Starmer pledging to increase it to 2.5% of GDP, could also push up interest rates if it results in increased government borrowing.

Although inflation has eased from a high of 11.1% in October 2022 to 2.3% last month, many investors are sceptical that rates will return to the lows seen post-financial crisis. Orla Garvey, a senior fixed-income portfolio manager at Federated Hermes, commented, “Inflation will be more volatile in the future because of the need for greater spending on things like defence. That will tend to make inflation bumpy.”

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