Increased interest rates will send business profits tumbling

Increased Interest Rates Will Send Business Profits TumblingGETTY

The US Federal Reserve finally hiked interest rates this year

The Institute of Directors (IoD) said profitability of UK companies had reached all-time highs, but believes things will change in the coming year.

The IoD said 2015 may have been “as good as it gets” for jobs, with employment possibly falling slightly from its current record high.

The directors’ group also predicted improved productivity, which it said is likely to return to its longterm trend rate of growth in 2016.

Interest rates getting pushed back and forth - Increased Interest Rates Will Send Business Profits TumblingGETTY

Opinion is divided on whether the rise in interest rates is a good thing

Interest rates - Increased Interest Rates Will Send Business Profits TumblingGETTY

Higher interest rates make borrowing less attractive

We are now at risk of seeing asset bubbles develop

James Sproule

James Sproule, chief economist at the IoD, said: “We have been living in a world of extraordinarily low interest rates for eight years, and are now at risk of seeing asset bubbles develop.

“The rate-setters on the Monetary Policy Committee have so far taken a cautious approach, but we believe they will have no choice but to start raising rates this year if they are to get monetary policy back to a position where it could be effective again if we hit another crisis.

"Ultra-low interest rates have promoted misallocation of credit, as larger businesses which can borrow have levered themselves while smaller businesses have not been able to gain a similar advantage.

“But this trend has almost certainly run its course and any interest rate rise will make borrowing less attractive and, as a consequence, corporate returns are likely to disappoint as the year progresses.”

Mark Carney Governor of the Bank of England - Increased Interest Rates Will Send Business Profits TumblingGETTY

Carney: The prospect of a rise will come into sharper relief at the turn of the year

Earlier this month, the US Federal Reserve finally pulled the trigger on its first hike in nearly a decade.

The Bank of England sent out confusing messages over interest rates after Governor Mark Carney initially cautioned that the prospect of a rise would come into “sharper relief’’ at the turn of the year, only to signal in the Bank’s last forecast of 2015 that the cost of borrowing was likely to remain on hold until the end of 2016.

America’s first rise since 2006 has put fresh pressure on the Bank to follow suit, although Mr Carney has been quick to reassure that rates will only begin to rise from the historic low of 0.5 per cent when UK economic conditions allow.

Increased Interest Rates Will Send Business Profits Tumbling
Increased Interest Rates Will Send Business Profits Tumbling
Increased Interest Rates Will Send Business Profits Tumbling
Increased Interest Rates Will Send Business Profits Tumbling

Increased Interest Rates Will Send Business Profits Tumbling

Increased Interest Rates Will Send Business Profits Tumbling