Interest rates - The new normal?

We have all enjoyed borrowing at low interest rates over the past 13 years. From February 2009 to June 2022, we saw the Bank of England (BoE) base rate at 1% or below. In the past year, we have seen a 3.75% rise in the BoE base rate.

The base rate is likely to rise further due to inflation not yet being contained. Speaking to a high street bank economist in the last month, they are expecting the base rate to rise at least two more times to just over 5%.

The question is how long will it stay at this level and what is the “new normal”?

The answer to this question will be important to our farming clients that have fixed-rate terms ending or are taking out new borrowing.

To think about what is “normal” we should look backwards. From the 1950s to now, the average BoE (or equivalent) base rate was around 4.5%. This suggests that where we are currently is actually somewhat “normal”.

The challenge for borrowers is that lenders have not significantly reduced their margins yet. This means that for the vast majority, the cost of borrowing is still over 6.5-7%. When interest rates were at the same rate prior to the 2008/09 financial crisis, the margins were significantly lower.

So, borrowers have two options:

1. Take the risk and choose a variable rate loan, hoping that in the longer-term, interest rates will come down
and as a result you will be better off not fixing, or fixing in the future at a lower rate.

2. Fix the loans now to secure your risk and know your monthly outgoings. Which option is best for you depends on your attitude to risk and business cashflow.

Which option is best for you depends on your attitude to risk and business cashflow.