Bank Of England Ties Rates Rises To Unemployment
Bank of England research shows zombie firms can't be blamed for the UK's productivity slump IBTimes UK

So-called 'zombie' firms, those kept alive by tolerant lenders turning a blind eye over breached loan terms, are not causing the slump in productivity.

A Bank of England (BoE) study found that bank forbearance for firms with no realistic prospect of recovery "appears to account for only a small proportion of the weakness in aggregate UK productivity".

It had been suggested that one of the drivers of low productivity in the UK was failing small businesses being kept alive by their lenient lenders choosing not to pull the plug. This would then drain bank resources away from viable firms looking to invest in jobs and growth.

"The survey did suggest, however, that low interest rates are likely to have been important in explaining higher firm survival rates over recent years," said the BoE.

"Results from this investigation highlighted vulnerabilities to a rise in interest rates if not accompanied by an improvement in economic conditions."

The BoE said just 14% small businesses with loans from major banks had been shown forbearance on their lending.

Private sector output per worker, or productivity, is 8% below its pre-crisis peak. It is 18% behind where it would be if the pre-crisis trend had been maintained and there had been no financial meltdown.

Policymakers at the BoE said they would not consider raising interest rates until the unemployment rate falls below 7%.

BoE forecasts suggest this will happen in the fourth quarter of 2015, but other economists predict unemployment to fall faster as the UK recovery takes hold.

Office for National Statistics figures show the UK unemployment rate fell to 7.4% in the three months to October 2013.