Brexit – where now for bank lending to farms and rural businesses and for interest rates?

It went down to the wire but the people of the United Kingdom voted to leave the European Union (EU). Everyone is reflecting on the outcome and we will face a period of uncertainty as the exact terms of our exit from the EU are negotiated. Once the UK Government gives notice to leave the EU by invoking Article 50 of the Lisbon Treaty, it will take at least two years to shake out the details and to see the impact of the decision. Although it is predicted this timescale will be longer.

Farmers’ votes were split, with a Farmers Weekly survey showing that 60% of UK farmers were planning to vote to leave the EU. Much has been written about the decisions that still need to made to make the exit as beneficial for UK farmers as possible. We’ve already covered some of these issues and provided links to the excellent NFU and CLA reports in our previous blogs.

The bigger banking picture

Looking at the larger economic picture, the financial markets were shocked by the result on Friday morning. But a repeat of the 2008 recession is unlikely to hit us. Mark Carney, Governor of the Bank of England, immediately announced that The Treasury and the Bank of England were well prepared for an exit vote and had “engaged in extensive contingency planning”. The Bank has more than £250bn of additional funds and “will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward.”

He gave comfort in declaring that the UK financial system is resilient and has been stress tested against far worse scenarios. He stated that the capital requirements of our largest banks are now ten times higher than before the banking crisis seven years ago. With over £130bn of capital, and more than £600bn of quality liquid assets, the banks have the flexibility to continue to lend to UK businesses and households, even during challenging times.

This is good news and we don’t expect there to be any change in bank sentiment in supporting farming at the moment. Indeed, our contacts in the agricultural units of the main banks and the alternative lenders have all indicated that “business is as usual.” It will, however, be interesting to see whether or when European Investment Bank funding, which has been available to some banks and agricultural lenders, will be withdrawn.

A monitor for banks' appetite to lend to farming

Banks don’t like uncertainty and volatility. With our close links to multiple lenders, R&BS are in a unique position to see how the Brexit decision might impact the banks’ abilities and decisions to lend to the farming industry.

As a specialist in agricultural and rural mortgages, we will be able to see if the banks change or tighten their credit policies for farming as a whole, or for certain farming sectors that may be hit harder by the decision, over the months to come. This will be an indication of how the banks think farm businesses will fare and how land prices and mortgage security values may be impacted in the long-term as new policies, support and trading relationships take hold.

It will be interesting to see if, for example, those farming sectors more reliant on export income or on migrant labour begin to find it more challenging to get finance from their banks as trade negotiations and policy developments move forward.

Where now for interest rates?

Interest rates are likely to be affected by the uncertainty. After the sharp fall in the pound, imports will be more expensive thus pushing up inflation—perhaps over the bank’s 2% target. Typically, the Bank of England increases interest rates to control inflation and higher interest rates may help the pound recover. But the Bank of England sees this type of inflation as temporary and the economy will be in need of stimulus, so an increase in Bank base rate is unlikely.

With interest rates currently at a historical low of 0.5%, cutting rates further is difficult. Whilst the Bank of England can deploy quantitative easing again and look to other support programmes to bolster the economy, we won’t rule out the Bank cutting the base rate to 0.25% or to zero in the coming months. The Monetary Policy Committee are due to meet on 14th July but the Governor could call an emergency meeting at any time.

However, fixed rate mortgage pricing is largely dictated by the cost of borrowing on the money markets and not by Bank base rate. As result of the uncertainty over the last week fixed rate costs of funds have reduced. We've already seen a 0.25% drop in 10 year fixed rate through a high street bank this week.

The exchange rate and BPS impacts

The sharp drop in the value of the pound would help UK exporters and lift agricultural commodity prices in the short-term. However, it will also make key imports such as fertiliser, fuel and agricultural chemicals more expensive and so the two may balance each other out.

Farmers will continue to receive their Basic Payment Scheme (BPS) payments for at least the next two years. With the rate set in euros, if the pound remains low this will mean a higher BPS payment for farmers. In the longer term, direct payments may continue to December 2020, when the present EU Common Agricultural Policy (CAP) term ends, but farm businesses should be looking ahead and planning for an era of different support.

Change, opportunity and solid support

The impacts of Brexit will take time to emerge. Change will always involve an element of risk, but it will also bring opportunities for some. If land prices do fall as some predict, then there will be more opportunities for some farms to expand. New international trade opportunities and more favourable regulation and direct support could be on the horizon.

While banks may become uncertain, and farmers may be uncertain of the future, R&BS have a clear mission to help our customers find the finance that is most suitable for their business and that sets them off on a secure and profitable path to the future. We will do all we can to help our clients navigate the challenges and opportunities that lie ahead.