Interest rates cut to 300-year low

The Bank of England has today (8 January) cut interest rates by half a percentage point to 1.5%, it has been announced.

The cut – the fourth since last October – means rates are now at their lowest level since the Bank of England was founded over 300 years ago.

It hopes this latest cut will be enough to aid a struggling economy and farmers, like other borrowers, will want banks and lenders pass on the cut immediately.

“The headline reductions in interest rates look good, but farmers will judge these developments by the level of reductions in their repayments and so far many farmers have expressed their annoyance that the commercial banking sector is not passing on the full benefits to their farm business customers,” Ulster Farmers’ Union president Graham Furey said.

“Farmers have a proven track record of ongoing investment in their businesses which helps the local economy, and it is frustrating that the full effects of Bank of England interest rate cuts aren’t passing through to farm businesses.”

Lloyds TSB & AMC’s Paul Spencer estimated that today’s cut, combined with the other reductions announced in the past 12 months, would give an annual saving in interest payments of roughly £200–250m for UK agriculture if base rates stayed at 1.5% for the whole of 2009.

“In simplistic terms this is the equivalent of around £3,000 for every £100,000 of variable rate borrowing since January 2008,” he said.

But, while those with variable rate loans and overdrafts would see an immediate benefit from today’s announcement, he said volatility remained a key challenge and farmers should try to counteract it through employing a robust approach to managing financial risk.

“Experience shows that when Bank of England base rate reaches the ‘bottom of the curve’, fixed rates tend to rise,” Mr Spencer said. “Against this backdrop, farmers should carefully consider the benefit of protecting against any future rise in finance costs by fixing the rate on their long-term borrowing.”

Join the debate about whether another interest rate cut will help farmers in the FWi forums.