Does inflation trigger early repayment on Covid-19 UK guaranteed loans?

The UK government underwrote more than 1.68 million business loans totalling £78.4bn during the COVID-19 pandemic. Given that the Bounce Back Loan (BBL) had a 100% guarantee and the Coronavirus Business Interruption Loan Scheme (CBILS) 80%, the public sector contingent liability is very large. In this article, we explore whether or not the recent and dramatic rises in UK inflation have prompted firms with COVID-19 BBL and CBILS guaranteed loans to repay their outstanding debt early (in advance of the full 6-year loan term as specified in the original loan agreement). Our results show that this was indeed the case with increasing inflation exerting a strong and positive effect on early loan repayment on both guarantee schemes. This is consistent with the firm’s debt aversion and a desire to reduce existing debts in anticipation of a future economic recession, liquidity problems and high interest rates.