Interest rate rise to affect borrowers

Published 2 August 18

Today (2 August) the Monetary Policy Committee voted to raise interest rates for only the second time since 2009. At first glance, this may seem odd timing as growth in the UK economy has been weak this year at 0.2%, in the 3 months to May 2018, as well as the continuing uncertainty surrounding Brexit. In addition, the trade war between the US and China would appear set to escalate, affecting global economic growth.

However, with the UK economy approaching full employment, any future growth could be inflationary. With employers competing for workers, driving wages higher and higher earnings driving consumption of goods and services, which in turn pushes prices higher. The rise is a quarter of 1%, putting the base rate up to 0.75%. In theory, this should strengthen sterling, with investors buying sterling is response to higher interest rates. However, with the prospect of a no deal Brexit still very much on the table, the markets are unlikely to see a major impact. This means the impact on the value of exports and imports is likely to be minimal.

What is important is the cost of borrowing. Those who have borrowed heavily compared to their income will feel the pinch. This will be important for agriculture, where borrowings may have been taken based on historical earnings. Therefore, an interest rise, coupled with the very real prospect of the level of support dropping in future years, indicates that close scrutiny of financial data would be prudent at this time.

Farmers with high levels of borrowing should be revisiting their budgets and communicating with lenders early. Future rate rises cannot be ruled out, although the Bank of England’s Mark Carney has indicated that any rises will be ‘limited and gradual’. He has also said that the final Brexit deal was ‘potentially the most important’ factor that would influence monetary policy in the coming months and years.

AHDB have a range of tools can be found on the ‘Fit for Future’ webpage, as well as a Brexit calculator can highlight how individual farms will perform under different scenarios.