Cost of long-term borrowing is rising

The cost of long-term borrowing is predicted to continue rising, despite base rates remaining at historically low levels, Lloyds TSB has told farmers.

The warning followed yesterday’s (9 July) decision by the Bank of England to keep base rate at 0.5%. It has been at this level for five months, but fears of rising inflation following the government’s “quantitative easing” measures to kick-start the economy – which in turn could influence fixed rates – means the cost of borrowing between banks is going up.

For example, the market rate for five-year, fixed-rate money increased by more than a third between its lowest point in February and the middle of June.

Farmers looking to secure long-term finance should be aware of this rising trend and plan accordingly, but not overlook the benefits from low variable rates, Lloyds’ agriculture director Paul Spencer said.

“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.

“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 said.

“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,” added 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.”