High interest rates are expected to limit banks’ lending to businesses this year before a rebound in 2025, according to a new forecast from Big Four firm EY.
Economic forecasting group the EY Item Club said in a report that net bank lending to businesses would remain low this year, rising just 0.8 per cent.
This figure would reverse a 2.1 per cent contraction from last year.
UK firms remain wary to take on debt as the economy struggles, having fallen into recession at the end of last year, while borrowing costs remain at a 16-year high.
However, as inflation cools and the Bank of England is expected to start cutting interest rates in June, experts forecasted a rebound in lending growth to 3.5 per cent for 2025.
Growth is then forecast to rise 3.2 per cent in 2026 as gross domestic product growth and borrowing costs stabilise.
Anna Anthony, UK financial services managing partner at EY, said: “Business investment and borrowing appetite is expected to be restrained for much of 2024 as firms continue to take a cautious approach to managing their balance sheets.
“However, as the economy improves, firms’ confidence to invest and grow should rise and bank lending to UK businesses is expected to lift substantially from 2025.”
Default rates are set to rise as borrowers grapple with high interest rates, with write-off rates on business loans expected to increase 0.22 per cent in 2024, from 0.14 per cent in 2023.
This figure is still far below the 1 per cent to 1.5 per cent rate seen in the early 2010s, following the financial crisis.
Total bank loans are set to rise 2.2 per cent this year, up from 0.6 per cent in 2023, driven by a fall in mortgage rates and a rebound in demand for home loans.
Mortgage lending fell 0.1 per cent last year as higher interest rates pushed up prices. This figure is forecasted to improve to 2.2 per cent growth this year, 3.4 per cent in 2025 and 3.3 per cent in 2026 as borrowing costs come down.
The group added that consumer credit demand would slow over the next two years as inflation falls.
UK unsecured credit grew 6.1 per cent last year, up from 4.2 per cent in 2022 – the fastest increase since 2017 – largely driven by inflation driving up the cost of goods and the cost-of-living crisis.
EY Item Club forecasted this growth to fall to 5.2 per cent in 2024 and 4.2 per cent in 2025, before ticking up to 4.5 per cent in 2026.