Interest rate increase of 0.25% would end 1 in 25 businesses, according to the Association of Business Recovery Professionals (R3)

One in 25 businesses would not be able to cope with an interest rate rise of just 0.25 per cent.

This is according to the latest survey from the Association of Business Recovery Professionals (known as R3). The figures suggest that some 80,000 firms would be unable to pay their debts in the event of such an increase – more than four times the number estimated when the survey was last conducted in September.

The survey revives deep and long-held concerns about the underlying health of the UK’s economy, and has renewed questions over the long-term viability of the country’s ultra-low interest rates.

Will rates rise?

The Bank of England has been under pressure to increase the base rate, in part to combat rising inflation. In April the Bank’s rate-setting Monetary Policy Committee voted 8-1 to keep the measure at its record low, but members who voted in favour acknowledged that they may opt for a hike if inflation rises higher.

The consensus amongst economists is that the base rate will remain at its current level until early 2018, as the Bank responds to growing evidence of an economic slowdown and the impact of the fall in sterling.

The R3 report sets out the impact of low rates on the UK economy, and particularly on the country’s ongoing productivity crisis.

‘Zombie’ companies on life support

Many economists believe that the near-zero base rate is prolonging the death of so-called ‘zombie companies’ that would not be able to survive in a normal interest rate landscape.

R3 spokesman Andrew Tate said that “only repaying interest [on business debt] is a common characteristic of a zombie business.” Some economists are concerned that efforts to keep zombie firms afloat are directing important capital away from more viable businesses that could be relied upon to help drive a more sustainable economic recovery.

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