Bank of England’s decision to raise interest rates – what does this mean for our industry?

Friday, 6 May 2022

On May 19, The Monetary Policy Committee raised interest rates to 1% from 0.75%, the fourth consecutive rise since December. Interest rates are used as a tool to manage inflation, by raising the cost of borrowing and thereby constraining consumer spending and business investment.

Inflation was already rising before Russia’s invasion of Ukraine, driven by pent up consumer demand from the successive Covid lockdowns, as well as rising global energy prices. The war has exacerbated the economic situations with consequences including slower economic growth globally and rising inflation. Countries dependent on Russian gas supplies facing some tough political decisions. In addition, the disruption of global grain markets and input markets (discussed in detail here) will impact agriculture for the foreseeable future. Globally the price of foodstuffs have risen significantly.

Inflation is likely to rise faster, higher and remain high for longer due to the impact of rising gas and electricity prices, along with food price inflation. Most forecast now predict inflation to hit between 8% and 11% by Q4 2022, a rate not seen in the UK for over 30 years. The effect of inflation on consumer behaviour and the likely impact on meat and dairy sales is examined here.

Economic growth forecasts have been revised downwards as consumers disposable income, buoyed up by savings, built up during successive lockdowns, are reduced. Then consumers real income is shrunk further by rising inflation. Although UK growth started strongly in 2022, it is likely to slow to a crawl, or even shrink by the year end. Lower income households will be the most adversely affected as food and fuel price rises force lower spending and trading down.

The Bank of England faced a difficult decision. Inflation was rising rapidly, but was no longer being driven primarily by consumer demand but by rising costs. The ability of this rate rise to mitigate the cost push element of inflation will, therefore, be limited. Avoiding tipping the economy into recession, whilst taming rampant inflation will be a delicate balancing act. The Monetary Policy Committee has indicated further rate rises are likely, with rates expected to reach 1.5% by August and 2.5% by 2023 before falling back. Although these rates are still low in historical terms, businesses with borrowings at rates that are not fixed will see repayments rise accordingly. At a time when farm business incomes are being squeezed by higher input prices and disappearing direct payments, this will be a significant issue.

In my January introduction to the AHDB Outlook, I mentioned how challenging making economic predictions can be. In the context of post – EU exit and a global pandemic, making accurate predictions about the future had to be set in context of the uncertain and rapidly changing backdrop. That uncertainty has increased exponentially since then. AHDB will continue to analyse the ongoing situation in Ukraine along with the global and domestic economic factors influencing farming in the UK, in order to support our levy payers through these turbulent times.