End of low interest rate era draws closer

The Bank of England’s base interest rate might still be at 0.5%, but according to Dick Mason, Agricultural Policy Director for Lloyds TSB, there are now signs that the cost of borrowing could soon be increasing.

"For interest rates to remain so low for such a long time is unprecedented and many farmers have taken up the opportunity in the last year or so to invest in their futures by borrowing at very favourable rates," he commented following the latest Bank of England announcement to keep the bank rate at an historic low.

"There will be many more, however, who are still deliberating over their future investment. It is these who should now factor into their thinking the possibility of a significant rise in interest rates over the next few years."

Lloyds TSB economists suggest that economic growth might be sluggish in the first half of 2011, but may well pick up into 2012. This could lead to a steady increase in base interest rates. The prediction is that the base rate will be 0.75% by the end of 2011 and up to 2.5% 12 months later. There are already signs that the LIBOR rate at which banks lend to each other is increasing.

"Two years is not long in business planning terms and the indications are that by then interest rates could be significantly higher," says Mr Mason.

"With confidence in farming increasing, now might be a good time to consider financing investments that will add to the future strength of your business. As ever, it is important that you get professional support and advice to ensure that your investment is adding as much as possible to the business."

Mr Mason reported that 2010 has seen significant investment by farmers, with new grain stores, slurry management systems for NVZ compliance, and renewable energy projects of particular interest.