Long-Term Fixed Rates Climbing Despite Stable 0.5% Base Rate

The Bank of England may have kept its base rates at 0.5% yesterday (9th July 2009), but the real cost of long-term borrowing is increasing and farmers need to consider how this will impact their business plans.

The base rate of interest has now been held at an historically low level for five months and economists are predicting it could remain at this level into 2011. However, they also caution that when the economy shows signs of sustained recovery then many of the fiscal policies, including a low interest rate, will likely be scaled back. At this point base rates could return quickly to pre recession levels.

“The current low bank base rate is advantageous for those looking to borrow on a variable rate basis and over the short term this could represent a good value-for-money option,” says Paul Spencer, Agriculture Director for Lloyds TSB Agriculture and the Agricultural Mortgage Corporation. “This will help especially with overdraft arrangements or those smaller projects with a low capital demand and short payback period. For a large number of farm businesses this has resulted in savings on the cost of finance – in turn enhancing farm profitability,” he says.

But the link between base rates and longer term fixed rate borrowing is less straightforward and those looking to secure funds on this basis should be aware that the market rate for long-term borrowing has been rising steadily since the start of 2009.

Fears about the risk of inflation, which in turn could influence fixed rates, are prompting predictions of further pressure on the cost of long term borrowing.

This projected rise has already led to an increase in the rate at which banks themselves have to borrow money.

For example, the market rate for five-year fixed rate money rose by more than a third between its lowest point in February and the middle of June this year – a trend reflected in the cost of lending to customers.

“The general economic climate seems to be driving an interest rate policy favourable to those sectors capable of taking advantage of relatively low costs of borrowing,” observes Mr Spencer. “Given its current GDP growth and generally positive outlook, agriculture is clearly one of these sectors and many farmers are looking to develop their business plans accordingly.

“There is, however, a danger in waiting for an indication that the base rate is about to rise before fixing to fund such plans,” warns Mr Spencer. “In doing so, farmers run the risk of missing the best fixed rates available for the longer term.”

“Whatever your borrowing needs or outlook on interest rates may be, it is important to seek independent professional advice and guidance regarding your own specific circumstances,” he concludes.