The Bank of England has increased interest rates by 0.75% to 3% in a move to try and contain inflation.
The rise, announced on 3 November, was widely expected by the financial markets. It is intended to restrict inflationary pressures in the economy. Although the inflation benchmark rate is set at 2%, the latest rate for September was 10.1% with no signs of falling. It is also the largest single rate rise since 1989.
These inflationary pressures, that include ag-inflation running at 28% and food price inflation, at its highest rate for 40 years, at 11.6%, highlight both the fragility and volatility of the UK economy. In order to control inflation, central banks, such as the Bank of England, use interest rates to dampen demand and reduce the circulation of capital within the economy. However, it also increases borrowing costs and as a result leads to a reduction in investment.
What the latest data also shows is that the gap between input and raw material costs for agricultural businesses and the farmgate prices they receive is widening. The rise in interest rates is putting real pressure on borrowing costs and it is important that members ensure that they continue to talk to their bank.