Proactive Investors - Britain’s base rate setter, the Bank of England, has pointed to concerns over rising interest on companies’ ability to service debt.
Following fourteen consecutive rate rises, which have seen UK interest climb to 5.25%, the bank warned more businesses were likely to struggle with their debt as it battles to stem rising inflation.
“Higher interest rates are putting pressure on indebted corporates through higher debt servicing costs,” the bank said in a blog post.
“Such pressure increases the likelihood of defaults on corporates’ debt and may lead some firms to reduce investment and employment sharply.”
Despite acknowledging the risks of higher interest rates, the Bank of England has been gripped in an effort to slow rampant inflation, after the UK consumer price index climbed as high as 11.1% in October.
Though inflation has indeed eased since, the big question remains over whether the Bank of England will opt to lift rates further in September, especially given prices across some sectors continue to rise.
“An increase is no longer a certainty” though, EY ITEM Club economist Martin Beck commented, following a reported fall in the UK’s purchasing managers index in July.
“This combination of a slowdown in both activity and inflation should give the Bank of England food for thought in advance of its next interest rate decision,” he added.
Analysts had been anticipating UK interest to rise as high as 6% prior to Wednesday’s PMI data being released.
Some still forecast another rise though, including Pantheon Macroeconomics analysts who tipped September could see one final interest rate hike by the central bank to 5.50%.
“The [Bank] will not be willing to take any risks with the inflation outlook and probably won't have seen enough hard evidence by their meeting next month to press the stop button,” analysts said.