Rising interest rates mean British companies face added pressure to repay debts and a higher risk of corporate defaults, the Bank of England has warned.
In a new post on the central bank's blog, it warned that higher debt servicing costs may lead to defaults or the need for firms to suddenly reduce investment and employment.
The share of non-financial UK companies under this stress — those with a low ratio of earnings to interest expenses — will rise from 45% in 2022 to 50% by the end of this year, according to the blog. This figure rose to 70% for medium-sized companies.
The post said: "Higher interest rates are putting pressure on indebted corporates through higher debt servicing costs. Such pressure increases the likelihood of defaults on corporates' debt and may lead some firms to reduce investment and employment sharply. Defaults can increase risks to financial stability directly through reducing lender resilience, while sharp reductions in investment and employment can indirectly affect financial stability by amplifying macroeconomic downturns."
The analysis compared statistics, such as low-interest coverage ratio, to those seen during the global financial crisis and dotcom crash. While it noted that current vulnerabilities are below the peaks reached during those events, it added that the peak share of vulnerable corporates was relatively low during the GFC.
The UK interest rate has risen from a record low of 0.1% in November 2021 to its current 5.25%. The BoE analysis used market expectations that the rate will climb to 6.1%.
David Bharier, head of research at the British Chambers of Commerce, said the BoE’s analysis was consistent with what it had heard from thousands of small and medium-sized companies (SMEs). “Rising borrowing costs are putting significant pressure on many smaller businesses, who after three years of economic shocks, are unable to absorb the increases,” said Bharier to Financial Times. “Many . . . will be concerned the real pain is yet to come,” he added.