Corporate returns 'likely to disappoint' if interest rate rises in 2016

A rise in interest rates in 2016 will make borrowing less attractive for large companies and put an end to the trend of increasing profits, a leading business group has predicted.

The Institute of Directors 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 long-term trend rate of growth in 2016.

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."