Interest is skyrocketing

We are experiencing unprecedented interest rate shocks as the US Central Bank (Fed) and European Central Bank (ECB) have decided to raise interest rates. The years of cheap money are coming to an end. The higher interest rate makes borrowing less attractive and possible because it negatively affects the payment capacity. Refinancing of loans, often applied in recent years to reduce the interest burden, is also a thing of the past.

Higher interest rates are used as the ultimate anti-inflation rate. Until recently, the ECB indicated that inflation would be a temporary matter, mainly due to the corona crisis and the war in Ukraine. People are now less convinced of this and the idea that it has a structural character is more embraced. As a result, the ECB introduced a 0,25 percentage point rate hike in July and another 0,75 percentage point in September. On Wednesday, the Fed raised interest rates by 0,75 percentage point for the third time in a row.

As always, the various analysts and bankers do not quite agree. On the one hand, some believe that if the war continues and the supply of Russian gas is further restricted, interest rates could rise even more sharply than now indicated by the ECB. On the other hand, other economists, such as those at Rabobank, believe that no major interest rate hikes will follow after September.

We will see exactly how it will be. One thing is clear, the interest party is also over for farmers. At least until recently I noticed that thoughts like 'it won't go so fast' and 'it will be okay'. This is understandable because we have not seen this interest rate rise in the past thirty years. For example, for well-financed, large companies, a ten-year fixed interest rate of 1,6% applied in January and 3,5% comes first in June.

What does 0,5 or 1 percentage point increase in interest rates mean? On average, on developing arable farms with a loan of €30.000 per hectare, it is about €150 to €300 per hectare. For the average dairy farm with 1.000.000 kilos of milk and a €1.000.000 loan, this is 0,5 to 1 eurocent per kilo of milk. In short, it really is about something. I think you're completely fooling yourself if you think this is without serious impact. After all, most missiles do damage.

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Peter Pals

Peter Pals is an entrepreneur at Farmers Funding & Advies and grew up on a farm. From his farming heart, he has decided to build up a business for business, financial and tax advice for agricultural entrepreneurs.