Base Rate  

Rising base rate put thousands at risk of bankruptcy

Rising base rate put thousands at risk of bankruptcy

A base rate increase of 1 per cent could result in 18,100 new insolvencies by 2020, new data has shown.

According to the latest forecast figures from the government’s Insolvency Service, even a modest increase of 0.5 per cent in the Bank of England’s base rate would lead to an extra 9,700 bankruptcies over the next three years.

The service calculated a 1 per cent increase would see 8,100 insolvencies by 2019, and a further 10,000 insolvencies the following year.

An Insolvency Service spokesperson said: “The Insolvency Service makes forecasts of the number of insolvencies for its own business planning needs.

"It has not specifically made forecasts of insolvencies resulting from changes in interest rates.

"However, some of the statistical models which inform these forecasts include interest rates as part of their calculations.

“These statistical models examine the statistical association between the number of insolvencies and a number of economic factors, such as household debt, GDP, interest rates and earnings.

"These associations, combined with external bodies’ forecasts of economic factors, lead to forecasts of insolvencies.

“The total number of individual insolvencies includes bankruptcies, individual voluntary arrangements (IVAs) and debt relief orders (DROs).

"The Insolvency Service maintains a model to forecast total individual insolvencies (the sum of all these three procedures)."

The base rate was cut to 0.25 per cent in August 2016, but the Bank of England’s Monetary Policy Committee (MPC) has signalled that it may raise the rate if inflation hits 2 per cent.

Earlier this month, inflation hit 1.8 per cent, its highest rate in two-and-a-half years.

Ruban Sanmuganathan, financial planner at Plutus Wealth Management, said: “We’re in a climate where I’ve seen since 2008 a flurry of my clients being made redundant, so the risk of an event happening that causes significant financial change is greater than ever.

“But it is not necessarily inflation itself that could cause a problem. The other issue is foreign exchange costs, for even a small company who is trying to import their supplies.

"That is going to be more expensive for them because of the Forex issue, and if interest rates go up then the costs of borrowing start to go up as well.

"This will create a leaner environment for businesses that don’t have the capacity to absorb such shocks, and if they don’t already have good cash reserves it could become a problem.”

The Insolvency Service figures assume that the effective interest rate remains constant throughout the forecasting period at 0.5 per cent and 1 per cent more than the effective interest rate as in July to September 2016.

Last year, the total number of insolvencies rose slightly but were still at their second-lowest level in 11 years.