Farmers planning to invest in their businesses should budget on interest rates rising to 7%, says HSBC economist Mark Berrisford-Smith.

Talking at the Royal Show,  Mr Berrisford-Smith said he expected two more quarter-point rises from the Bank of England in July and September taking its base rate up to 6%.

Rates could then hold until the end of 2008,  he reckoned, but any risks to that scenario were all on the upside.

“Doing your budgets at 7% would not be a futile exercise. I’m not sure rates will get there, but be prepared. I don’t expect rates to be back at the low levels we’ve been seeing anytime soon.”

‘Period of stability’

Euryn Jones, Barclays agricultural policy director, however, was slightly more optimistic. “Our expectation is for rates to increase by another 0.25%, but thereafter we’re hopeful of a period of stability for up to 18 months.

But Mr Jones said the picture was less clear over the long term and he advised farmers to consider protecting their borrowing rates. “If you’re borrowing over £0.5m there are more sophisticated ways to do that than just a straight fix.”

Mr Berrisford-Smith said it was significant that Bank of England governor Mervyn King had voted against the decision of most of his monetary policy committee to hold rates at its June meeting. “Alarm bells are ringing in his head that the committee is not being tough enough.”

‘Agflation’

In terms of inflation, which is outside its target level, The Bank of England had been caught napping, he added.

“We are seeing a new word in the language, people are now talking about agflation. Despite the best efforts of retailers food prices are increasing, maybe the era of cheap goods is really over.”

However, he warned that some of the recent gains in agricultural commodities could be “froth” caused by fund managers entering the market for the first time. “We need to untangle how much the presence of institutional players is underpinning the market.”

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