Static bank rate should not delay investment

Those farmers with plans to invest in their businesses over the next 3 years should consider prompt action to borrow at fixed interest rates despite the Bank of England deciding to maintain the 0.5% Bank Rate for a further month.

This is the view of Jonathan Allright, Head of the Agricultural Mortgage Corporation (AMC), who says the headline rate is masking a steady rise in the actual cost of money and believes that delaying any investment plans is only likely to lead to more expensive borrowing in the foreseeable future.

"There is a risk that farmers are now so accustomed to low interest rates that they are failing to acknowledge the likelihood that borrowing will become more expensive over the next few years," he says. "It is now two years since the Bank of England dropped its Bank Rate to 0.5% and nearly four years since it last raised rates. Whilst complacency may be understandable it is also misplaced.

"Three of the nine economists on the Bank of England’s Monetary Policy Committee voted for an interest rate increase in February, showing that the appetite for higher rates is growing. We may have seen another month without movement, but pressure for an increase is building and few economists are arguing against an increase before the end of the year at the latest."

David Page, economist with Lloyds Bank Corporate Markets, provides a well-researched and balanced view of the near future.

"We anticipate a rise in the Bank of England Bank Rate to 0.75% by the end of 2011 at the latest, rising to 2.5% by the end of 2012," he says. "It is possible that the first rise could come soon, possibly in May at the time of the next Inflation Report, in which case we could see rates rise to 1.25% by the end of this year, but the expectation would still be for 2.5% by the end of 2012."

Mr Allright explains that whilst margins on lending may be "over Bank of England Bank Rate" the cost of money sourced by banks is based on LIBOR and this rate is predicted to rise faster than the Bank Rate in the future.

"Good business managers should be taking into account the prospect of higher costs of borrowing and the impact that this might have on their business, even to the extent of bringing forward investment plans so as to benefit as much as possible from the relatively low cost borrowing currently available."