U.K. Firms are Starting to Worry About Rising Borrowing Costs

(Bloomberg) -- The prospect of further interest-rate increases is increasingly worrying U.K. firms, posing a risk to the highest levels of business confidence in five months.

The Lloyds Bank Business Barometer, released on Monday, found that half of 1,200 firms polled expect to raise prices in the coming year to cover escalating wage bills and other expenses, intensifying the cost of living crisis facing households. 

The responses revealed the sensitivity of companies to historically modest increases in the cost of borrowing. Four in 10 said they'd be concerned if the Bank of England raised rates to 1%, a level that markets expect to be reached by May. A rate of 2%, predicted by traders over the next year, would triggers alarm bells for six in 10. 

Many of the responses were received after the BOE raised the benchmark rate to 0.5% on Feb. 3 in a bid to rein in inflation, which is set to top 7% by April -– more than triple the rate targeted by policy makers. 

For now, business confidence is rising widely across regions and sectors, and more than half of firms expect to increase staffing levels, Lloyds said. 

However, it remains to be seen how well sentiment holds up in the wake of Russia's invasion of Ukraine, which has driven up oil prices and cast a shadow over global growth prospects. 

The Lloyds survey suggests that workers are facing a deep squeeze on their living standards. While a quarter of firms are anticipating pay growth of as much as 3%, that's less than the pace prices are rising.

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