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Interest rate rise costs £700 million a year

The Bank of England?s recent quarter-point rise in interest rates will add £700 million ($1.28 billion) a year to the costs of the UK?s 100 largest companies, according to a study by REL Consulting Group.

The increase in costs can be set against corporation tax, but still amounts to around £500 million a year or £2.5 billion since the Bank began raising rates. The primary cause of this cost rise is the £282 billion in debt owed by the UK?s top 100 companies.

?The recent interest rate rises are going to hit businesses across Britain very hard. Business managers who were beginning to feel that the economic downturn of recent years had been left behind are now facing another threat to their profitability,? said REL director Dickie Bielenberg.

The REL study suggests that alongside a company?s usual tools for dealing with rising interest rates, corporates may benefit from trying to unlock the capital frozen in blocked inventories and accounts receivable. It concludes that ?with the debt markets becoming increasingly expensive the cheapest source of capital for companies is working capital?.

Piers Lightfoot at REL points to a lack of confidence in worldwide markets as a reason why companies are not freeing up capital.

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