For almost 10 years the Bank of England base rate has remained below 1% with minor small adjustments during that time.
Senior economists had begun making predictions in 2011/12 that the rate would rise steadily but surely to 2% and above by 2015. This never materialised and, despite those predictions, the expectation within the money markets was that it would still rise but take a little bit longer.
We are almost into the third decade of the new century and the money markets are suggesting that base rates are likely to remain low for some considerable time.
Why were the economists’ predictions so wrong? There has been an unprecedented spell of economic uncertainty and within the UK much of this is being blamed on the issues relating to Brexit. But is that the true underlying reason? It certainly won’t have helped matters, and current economic forecasts for the UK economy show shrinking output; there is even talk of another recession.
So how long will interest rates remain at these historically low levels?
When I visit farms throughout the country and provide funding through the Agricultural Mortgage Corporation, I am often asked about ﬁxing money long term. AMC can provide ﬁxed rate loans for up to 30 years both on a repayment (annuity) basis and/or interest only. Farmers of a certain vintage recall Bank of England base rates as high as 17% in the early 1980s and when money fell back to single ﬁgures some farmers ﬁxed rates long-term at levels that now seem exceptionally high, such as 9%.
In times of recession banks tend to get nervous themselves and often raise margins on new loans, and any loans which are due for renewal even within a term could be increased. Banks are required to have a certain amount of capital behind them when providing loans and they can only do so by raising margins. Should the country dip back into recession then the likelihood is that the cost of borrowing money will increase. The problem the Treasury has is that there is now very little wiggle room to help the economy. The Deputy Governor of the Bank of England for Financial Stability, Sir Jon Cunliffe, said in September 2018:
The current yield curve sees the bank rate rising slowly over three years and levelling oﬀ at under 2% for the next 30 years. The average policy loosening cycle in the UK pre 2008 was around 2%. If that remained the case, we would have less room for manoeuvre in the face of a sharp downturn, particularly if that happened in the near future.
It now looks as though Sir Jon’s prediction will be wrong – base rate is more likely to go down than up before the end of the year. The Governors made a very strong stance at the last quarter by holding the base rate at 0.75% but the money markets are, I would suggest, predicting a downturn with long-term ﬁxed rate pricing at rock-bottom.
So is it now time to ﬁx long-term if your business can aﬀord it? Farmers always have to think long-term and farm as if they will live forever. With AMC oﬀering up to 30 years ﬁxed money it will be hugely tempting to lock in an exceptionally low rate guaranteed not to change and without any breaks or renewals for the long term. The risk is that, should the borrower have to repay the loan early, there could be signiﬁcant breakage costs even if the rate is exceptionally low. On the plus side, ﬁxing long-term allows a business to budget for the future.
So all the predictions in the past 10 years that the Bank of England would raise interest rates were incorrect. But will we ever see this change in the future? Looking at the Bank of Japan base rate suggests the answer could be no. Japan had one of the world’s most evolved and fast-growing economies towards the end of the last century, yet, following a signiﬁcant economic downturn their central bank base rate dropped below 1% and has not risen for more than 30 years.
What does this tell us about where our own economy is going? I don't know, but one sure thing is that there is no point in asking economists because they don’t know either. We live in interesting times but, as sure as the sun rises and sets daily, we will always need food production and the demand for land will continue to remain strong indeﬁnitely. Following the crash of 2008 the investments changed quickly from stocks and shares to gold and land which are usually seen as safe havens.
Should the economy fall into recession in the near future is this likely to push up the value of land? I doubt if land can rise much further and still be economically viable if servicing 50% debt on it, but I predict we will not see a fall in land prices as the increasing population across the world will always need to be fed.