The benefit of Thursday’s bank base rate cut could be dwarfed by the effect of the poor economic outlook, warn advisers.
The base rate cut to 0.25% – the lowest-ever rate – will be widely welcomed, but will not mean reduced borrowing costs for all farm businesses. Some banks have not moved to pass on the cut and many loans are on fixed rates.
“The bigger impact is of course the effect on the currency, the wider economy and eventually inflation,” said Graham Redman of farm business consultant Andersons.
“It is Mark Carney’s primary job to manage inflation, so he is either concerned about deflation [highly unlikely] or has given a shot in the arm for our slowing economy, which suggests rates won’t stay this low for very long.”
The pound fell on the rate cut, but has since recovered slightly to leave it about 8.5% lower than the US dollar just after the referendum result and about 12% lower than at the start of this year.
It has also fallen sharply against the euro, down by almost 10% since the referendum result and by about 17% over the past year, boosting export commodity prices, but pushing up the cost of imports such as feed ingredients and machinery.
Service sector slowdown
Several sets of post-Brexit vote economic data released over the past week pointed to sharp slowdowns in the services, manufacturing and construction sectors, said NFU economist Anand Dossa.
“The UK’s services sector, which accounts for more than 75% of the UK’s GDP, is tumbling towards a recession. Likewise, construction numbers based on the Purchasing Mangers’ Index on Tuesday also showed a marked downturn and manufacturing numbers on Monday told a similar story,” said Mr Dossa.
The level of concern about the economy was shown by the other measures taken by the bank alongside the base rate cut:
- Providing cash to buy up to £10bn of UK corporate bonds and a further £60bn created to put into UK government bonds – measures commonly called quantitative easing
- A scheme to help banks pass on to customers the benefit of the rate reduction
- It forecast UK economic growth at 2% for 2016 (unchanged), but cut the forecasts for 2017 to 0.8% compared with a May forecast of 2.3%. The forecast for 2018 was cut from 2.3% to 1.8%.