Variable and fixed rate debt: Gambling on the future state of the economy after Covid-19

Abstract After a decade of low and stable interest rates, recent global events have introduced a significant degree of economic turbulence causing a spike in inflation and central banks across the world to raise their base rates. This in turn was transmitted to commercial lenders who raised their loan interest rates. In this paper we use a large UK firm survey for 2020–2023 to consider the extent to which firms were able to access fixed or variable rate loans, and the types of firms and debt associated with each type of loan interest rate. This is important as fixed rate loans insure the borrower against future adverse states of the economy whilst lenders may prefer variable rate loans as this insures them against future volatility and uncertainty, and shifts risk to the borrower. Our key findings are that only 19.5% of loans were issued at a variable rate and that larger and more risk-tolerant firms received variable rate loans. We also found that mortgage debt was the most likely to be issued at variable rates of interest.