The Bank of England has hinted that interest rates may rise in the next few months, which could put further pressure on farming businesses.
A rise would increase the cost of borrowing, although the rise from the Bank’s historically low rate of 0.25% is only expected to reach 0.5%.
But the pound is likely to strengthen as a result, which would have a bigger impact on farming businesses, say advisers, because sterling’s 30-year low has boosted agricultural exports and pushed up farmgate prices and BPS payments.
The pound already jumped slightly against the euro and the US dollar in reaction to a rate rise hint from the Bank of England.
Gary Markham, director at tax advisers and accountants Land Family Business, advised farmers to keep an eye on the value of the pound.
How to manage the risk
Farmers should look to manage risk, advised Mr Markham, as follows:
- Speak to your bank manager and ask what fixed rates are doing – if they’re not changing much then it means the financial markets are not panicking about the possible rate rise
- If you have a “reasonable” amount of borrowing, think about putting a third to a half of it on a fixed rate
- If you have a low amount of borrowing, stay on a variable rate because it’s likely to be cheaper
- Look into hedging your crops – selling forward to manage risk
- Match your funding to your investment – don’t use your overdraft to buy something big like a tractor
- If your overdraft is higher than your total variable costs then it’s probably too high and you should look at putting it on a loan.
Just because interest rates might be on the rise soon doesn’t mean businesses should necessarily be put off borrowing if they can afford to, he added.
Most entrepreneurs need to borrow to grow and your bank should only lend what you can afford to repay – this should not be based on the value of your assets.
What the Bank of England has said
A member of the monetary policy committee at the Bank of England hinted strongly this morning (15 September) that rates would rise in the next few months.
Gertjan Vlieghe, external monetary policy committee member at the Bank of England, said: “The evolution of the data is increasingly suggesting that we are approaching the moment when the bank rate may need to rise.
“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in bank rate might be as early as in the coming months.”