Analyst Insight: How does an interest rate cut affect your grain price?

Thursday, 12 March 2020

How does an interest rate cut affect your grain price?

Sterling has fallen to its lowest level since November 2019, following an emergency cut to UK interest rates. The cut by 50 basis points has been carried out by the Bank of England with the hope of reviving the UK economy amid Covid-19 fears.

A cut to the UK interest rate is designed to boost investment funding in the UK economy, by making borrowing cheaper.

How does this affect you?

A cut to interest rates, as well as reducing the cost of borrowing, also reduces the attractiveness of saving. The attractiveness of saving doesn’t just affect the domestic market, internationally it reduces the incentive to hold sterling denoted saving. As a result the demand for sterling reduces weakening the domestic exchange rate.

As the exchange rate falls it becomes more expensive for the domestic market to import raising the parity price, and supporting the value of UK agricultural products.

What has happened to exchange rates and agricultural prices?

In response to Wednesday’s budget and the cut to exchange rates sterling fell by 0.6% against the euro and by 0.7% against the dollar, the value of sterling has fallen further today.

UK wheat futures continued to decline yesterday, responding to declines in the global market and somewhat outweighing the impact of the exchange rate weakness. However, the decline may have been greater had the value of sterling not fallen. French feed wheat futures (May-20) fell yesterday by €0.75/t. However, when converted to sterling, the French wheat market fell by just £0.12/t. The fall in the value of sterling limited declines in the pound based price relative to those seen in the euro based price.

Where next?

The path of sterling as we move forward will be dictated by many factors, not least the prevalence of Covid-19 in the UK, and the path of the UK economy.

It seems unlikely that we will see any further cuts in the exchange rate, at least in the short term, and the Bank of England will likely be reliant on asset purchases (quantitative easing) to boost the economy further.

As far as the grain market itself is concerned Peter covered some of the drivers at present in Grain Market Daily earlier this week, including currency, the black sea region and the southern hemisphere.

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