Bank base rate rise - the moveable feast

Over the last three years, despite numerous expert predictions as to when the Bank of England will raise the base rate, an increase has been illusive. It seems that no sooner does a rise come into sight than it moves again as unforeseen and unpredictable forces come to light.

Fortunately for borrowers, given recent economic shifts, bank base rate will remain low for the foreseeable future as will the cost of bank borrowing. In the current climate, borrowers might consider keeping their loans on a variable rate of interest for the meantime and keeping an eye on where their banks’ ‘fixed rate cost of funds’ might be moving, which is a good and practical predictor of when the Bank of England is likely to raise the base rate.

But what is influencing the Bank of England’s decisions and ultimately the cost of borrowing?

Winter of change

Throughout the Autumn of 2014 there was considerable debate among Monetary Policy Committee (MPC) members as to whether interest rates would rise in the foreseeable future; it was expected to be more a matter of ‘when’ rather than ‘if’ in 2015. Two members regularly argued for a rise sooner to pre-empt and counter an upward pressure on inflation once economic growth took off boosted by employment and wage increases.

In December 2014 the MPC changed its tune dramatically. Global growth indicators dropped significantly and inflationary pressures were suddenly relieved. As a consequence, in January 2015, members were unanimous in their decision to maintain bank base rate at 0.5% and indications are that this will remain the case well into 2016.

The factors that have brought about this change have been the drop in world market interest rates and the continuing drop in oil prices since summer 2014.

There is little doubt that there has been an oversupply of oil, but there is the question of whether this price drop is due to a global slowdown albeit that other indicative commodity prices have not experienced the same collapse. Similarly, a fall in market interest rates also might be in anticipation and expectation of a slowdown in global growth prospects and the demand for goods around the world.

Quantitative Easing

...and then there is Quantitative Easing (QE). The world is in uncharted waters with QE. QE on the global scale that it has and is being employed is unprecedented. We don’t understand its implications and we are operating outside of our understanding of monetary and fiscal policy... in essence no one has experience of this situation and we are all blind.

Some schools of thought consider that QE simply offers a short term fix. Used as a tool to stimulate the economy by mechanisms, such as, ‘help to buy’ and ‘funding for lending’, it is initially expansionary but has the potential to be contractionary and deflationary over the long term. In essence, it has been used as a ‘prop’ for businesses (including bad businesses) whereas they should have been encouraged to focus on addressing more fundamental issues of productivity and efficiency.

Bucking the trend

The UK economy appears to be bucking the global trend at present. We have a low inflation and high growth environment and consumers are feeling comfortable. However, we might question why we are bucking the trend and whether this is likely to continue.

Against a backdrop of slowing global growth and a potential drop in export revenue, we have a looming election which could bring delayed, and some might argue, overdue austerity measures and, with the effects of QE unknown, we ought to be cautious of our prospects and mindful of the unexpected.

What this means for farming and rural businesses

The prospect of continuing low cost borrowing and low oil prices will be very welcome, the latter of which will have a direct effect upon fuel costs and will potentially reduce input prices too. This might go some way towards mitigating against some of the falls in commodity prices currently experienced, but not all.

There is no doubt we are experiencing some very interesting times, so it is essential that any business is on its best possible financial footing. To help with this, R&BS can offer a free initial feasibility assessment to discuss the ways in which the cost and structure of borrowings might be improved.