British companies are facing a £42 billion debt crisis following the era of ultra-low interest rates

British companies are bracing for a debt crisis as high interest rates are expected to cost a further £41.7 billion by the end of the decade.

The expiration of cheap loans is expected to increase borrowing costs, which will have a significant impact on the economy.

According to consultancy Baringa, businesses will face an average annual increase of £4.7 billion in debt service costs as a result of the Bank of England's decision to end the era of ultra-low interest rates, which will drive up borrowing costs will rise to the highest level in 17 years.

Economist and Baringa partner Nick Forrest highlighted the potential inflationary pressures as companies could be forced to raise prices to control increased costs, with some companies facing the prospect of a collapse. Forrest noted, “It's tempting to look at stagnant or declining interest rates and conclude that we're out of the woods. Unfortunately, this obscures the truth that the rate hike since late 2021 will doom businesses and the broader economy to a massive hangover for years to come.”

Baringa estimates that debt worth £1.6 trillion will be refinanced between 2024 and 2030. Since December 2021, the Bank of England has increased its base rate from 0.1% at the peak of the Covid pandemic to 5.25% to combat the cost of living. .

Despite hopes that a return of inflation towards the Bank's 2% target would lead to interest rate cuts, continued price increases in the services sector and the upcoming general election mean analysts now expect cuts to begin later this year.

Many companies are likely to struggle, especially as most finance directors have little experience managing funding costs at this level. Forrest warned: “Ultimately, the highly indebted companies and sectors that took out debt when it was so much cheaper, and are facing other headwinds, will struggle, and I'm sure there will be some companies will be where this is the last straw. on the camel's back.”

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

Economists at BNP Paribas, Europe's second-largest bank, have warned that inflation will be higher and more volatile in the coming years due to factors such as deglobalization, the transition to net zero and increased geopolitical instability. Matthew Swannell, a GDP economist, stated: “The world is probably, all else being equal, more inflationary. As a result, the neutral interest rate is higher because central banks will always work to keep inflation at 2%.”

Higher defense spending, with both Rishi Sunak and Keir Starmer promising to increase it to 2.5% of GDP, could also push interest rates higher if it results in more government borrowing.

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

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