Will interest rates be on the move soon?

Opinions on whether the Bank of England base rate will increase from its low of 0.25% have been divided for some time.

In June, three Bank of England Monetary Policy Committee (MPC) members voted to increase the base rate to 0.5%. However, against the backdrop of a pressures on consumer spending and a slowdown in the country’s economic growth, they were outvoted by the five other policymakers, including Governor Mark Carney. It was an indication of pressure, as this was the largest vote for an increase since 2011.

In his Mansion House speech later that month, the Governor said, in his view, it was not yet the right time to raise interest rates despite inflation hitting 2.9% in May, a good deal above its 2% target. He argued it would be wrong to raise borrowing costs before there was any indication of how the Brexit negotiations will play out. He also stated that wage growth was too weak to justify a rate hike.

Move forward three months to September and things changed. In an interview on BBC Radio 4 at the end of the month, the Governor gave his strongest sign yet that he might switch his vote.

At the time, lower unemployment figures and stronger inflation were making a hike in interest rates more likely. The Governor said that if the economy continues on its track, a base rate increase could be expected in the ‘relatively near term’. But he did say that when, and if, it came it would be limited and gradual.

However, news from other economic experts differs. A BBC snapshot of economists’ views in early September said many did not expect UK interest rates to rise until 2019, despite inflation remaining above target. They confirmed the MPC would be reluctant to raise rates during Brexit negotiations. Only one of the surveyed economists predicted a rate jump in November.

The arguments for and against an interest rate rise in November

Clearly analysts and the MPC are divided in opinion because, while there are arguments for a rate increase now, there are just as many arguments for rates to remain where they are.

There are encouraging indications of economic strength. Unemployment reached a 42-year low of 4.3% in July. Retail sales are showing a larger than expected growth and Consumer Confidence figures are improving.

Inflation has risen sharply. It has risen to 3% this month. With a target inflation rate of 2%, increasing the base rate could curb that growth.

However, some analysts suggest that the economy is lack lustre. Wage growth is low with little risk of wages impacting inflation. Brexit negotiations continue to pose uncertainty. There is a risk to the economy if households, businesses and the financial markets react badly to Brexit’s slow progress. The Bank must balance cutting inflation with keeping borrowing costs low to support business activity and ultimately jobs.

So, will rates go up? The next opportunity for a change in interest rates is at the MPC meeting on 2 November. The Governor has given his strongest opinion yet and we can’t ignore that or the influence he might have on the other MPC members. The counter arguments to a rate rise are still relevant and there is no convincing data evident to contradict this opinion yet.

What does this mean for farm and rural businesses?

It’s a difficult one to call. The money market is shifting to reflect expectations of a base rate rise soon. From our analysis of interest rates, between June to September fixed rate cost of funds had only edged up by around 0.1% across the range. However, since the Governor’s BBC Radio 4 interview, some banks are now showing a marked increase (some up to 0.5%).

It is time to open the dialogue with your bank or lender and ask about your options. Find out what fixed rates they have on offer and their prospects of any further upward movement. Decisions on whether to fix now or to wait will be different for each individual business and dependent on the business circumstances and its attitude to risk.

It is essential that any business is in a strong financial position now and for the future. To help with this, R&BS offer a free initial feasibility assessment to discuss the ways in which the cost and structure of borrowings might be improved.