The majority of farms in the UK have some sort of banking and agricultural loans on their balance sheet. A change in the base rate will, therefore, affect the businesses repayments on the loans unless they already have fix rated the loan. With Brexit still looming over us we have to consider how will Brexit affect the Bank of England base rate?
If I sat here a year ago writing this article, I would have said that we should be expecting the Bank of England to make at least one, if not two increases to the Bank of England base rate in 2019.
Sitting here now if the economists are expecting very little change to the rate, expect a decrease in the base rate over the next year.
The current market has low confidence in the growth of the world’s key markets. Brexit is just a small part of this mood. The world we currently have, a trade war between the USA and China, heated tensions between the West and the Middle East, and then Brexit to add onto that, means investors have little confidence in the global market.
If you look at today’s market at the Gilt market (government bonds), the short term rate of return has exceeded the long term rate of return – meaning investors are expecting the global economy to get worse, not better.
As a result, it means an interest rate increase should be a way off. However, given the uncertainty of the market, it has meant that investors such as pension and hedge funds are now looking to lock into long term guaranteed deals as they feel that another recession could be around the corner.
This means that a farming business with bank debt could lock into fixed rates for up to 25 years at historically cheap rates. The benefit of this is that it will give you long term security of payment amount and is ultimately a good deal when you compare it to historic rates.
In terms of the aftermath of 31 October, or now 31 January, it’s going to more than likely, as Iain McVicar has indicated previously, that there will be a weakening of the pound.
If this “run” on the pound does occur, it may force the Bank of England to raise the base rate quicker than it would otherwise like. Therefore a fix of interest rate now, maybe beneficial anyway.
I think to put the current market into context and we consider the historic Bank of England base rate 30 years ago, in 1989; the base rate was 13.875%. If we look at the rate 30 years before that in 1959 the base rate was 4% not too different to 10 years ago.
Ultimately the global economy works in a cycle. I would not be surprised if within my working lifetime I see interest rates of 10% or above. My recommendation therefore to anyone looking to take out any bank loan, whether that is a residential mortgage or a business loan, would be to fix your finance for as long as you can.
If you have any more questions like ‘How will Brexit affect the Bank of England base rate?’ please get in contact with our farms and estates team.
Read the full Autumn 2019 Newsletter here.