The majority of the group's long-term borrowings has been, and is, subject to fixed interest rates. The group has entered into interest rate swap agreements with commercial banks and other institutions to vary the amounts and period for which interest rates are fixed. At 31 March 2002, the group had outstanding interest rate swap agreements with notional principal amounts totalling £7,870 million compared to £9,574 million at 31 March 2001.

The long-term debt instruments which BT issued in December 2000 and February 2001 both contained covenants that if the BT group credit rating were downgraded below A3 in the case of Moody's or below A minus in the case of Standard & Poor's (S&P), additional interest would accrue from the next interest coupon period at the rate of 0.25 percentage points for each ratings category adjustment by each ratings agency. In May 2001, Moody's downgraded BT's credit rating to Baa1, which increases BT's annual interest charge by approximately £32 million. BT's credit rating from S&P is A minus. Based upon the total amount of debt of £12.8 billion outstanding on these instruments at 31 March 2002, BT's annual interest charge would increase by approximately £65 million if BT's credit rating was to fall by one credit rating category by both agencies below a long-term debt rating of Baa1/A minus.

Based upon the composition of net debt at 31 March 2002, a one percentage point increase in interest rates would increase the group's annual net interest expense by less than £20 million. Based upon the composition of net debt at 31 March 2001, a one percentage point increase in interest rates would have increased the group's annual net interest expense by less than £90 million.

The group's exposure to changes in currency rates decreased following the demerger of the mmO2 business including its activities in Europe. A 10% strengthening in sterling against major currencies would cause the group's net assets at 31 March 2002 to fall by less than £150 million, with insignificant effect on the group's profit. This compares with a fall of less than £1,200 million in net assets based on the group's net assets at 31 March 2001 using the same variation in currency rates. Foreign exchange contracts are entered into as a hedge of sales and purchases, accordingly a change in the fair value of the hedge is offset by a corresponding change in the value of the underlying sale or purchase.