Rising interest rates are putting British companies under pressure and will lead to an increase in insolvencies and a “drastic” reduction in investment and employment, the Bank of England warned in a report on Tuesday.
The central bank stresses that half of British companies will be rated at the end of this year with a low interest coverage ratio (ICR), a ratio that compares the debt to profitability of a company and helps determine its ability to meet its obligations.
That ratio, the highest since the 2009 crisis, will have risen from 45 % in 2022, according to data from the Bank of England, which in recent months has raised rates to 5.25 %.
Rising interest rates are already causing medium and large companies to struggle to service their debt, according to the Bank of England.
“Rising interest payments relative to corporate profits are making it more difficult for some medium and large firms to service their debt,” the report notes.
“Insolvencies can increase financial stability risks directly by reducing lender resilience, while abrupt reductions in investment and employment can affect financial stability indirectly by amplifying macroeconomic downturns,” it adds.
British CPI at 6.8%.
The British Consumer Price Index (CPI) stood at 6.8 % in the twelve months to July, compared with 7.9 % year-on-year in June, according to the Office for National Statistics (ONS).This fall was due to a decline in commodity prices as well as electricity prices, the ONS said.
ONS deputy director of prices Matthew Corder said today that inflation “slowed markedly for the second month in a row, driven by falls in gas and electricity prices as the reduction in the energy price cap came into effect.”
“Although still high, food price inflation has also fallen again, particularly for milk, bread and cereals,” he added.Finance minister Jeremy Hunt said in a statement to the media that “the decisive action we have taken to tackle inflation is working” but “we are not on target”.
Interest rate hike
The Bank of England recently raised interest rates from 5 to 5.25 %, the highest level in 15 years, in order to control inflation.
This was the 14th consecutive increase in the price of money by the Bank of England, which aims to keep inflation under control so that it remains at 2 %.
The bank expects inflation to fall this year and to reach its 2 % target by early 2025.