By Alice McFarlane

Interest rate drop prompts discussion on finances for farmers

Jun 18, 2024 | 3:04 PM

It’s a good time for farmers and ranchers to review their financial strategies.

The Bank of Canada lowered its target rate by 25 basis points to 4.75 per cent from 5.00 per cent. The target rate is used to set financial institutions’ prime rate and influences variable mortgage rates.

Farm Credit Canada (FCC) Manager of Economics Krishen Rangasamy said when the overnight rate changes, the prime rate typically changes by the same amount.

“This key interest rate has been increasing since March 2022. With inflation having peaked and now heading towards the Bank of Canada’s two per cent target, it makes sense for the central bank to provide relief to a struggling economy by lowering the overnight rate,” he said.

With the decrease it is a good time for producers, agribusinesses and food processors to review their financing options, especially as FCC Economics forecasts two additional interest rate cuts in the second half of this year.

Court proceedings

'The impact of this trauma will echo for generations': court case surrounding La Ronge woman's death reaches conclusion

11h ago

Going Global

P.A.'s Zablocki named to Team Canada for U18 Women's World Championships

12h ago

Election 2024

Birch Hills staff won't share election decision

12h ago

A recent analysis by FCC assessed the costs and benefits of taking out a fixed or variable-rate loan, considering today’s economic environment and different scenarios. The analysis showed that if the Bank of Canada were to drastically cut rates, borrowers could benefit from lower payments over a five-year period if they opt for a variable rate loan.

But if the Bank of Canada instead opts for a gradual approach in cutting interest rates, there would be little difference between taking out a fixed-rate or variable rate loan with respect to total payments over a five-year period.

Rangasamy said a fixed rate option would bring predictability in managing future interest expenses. He said borrowers should think carefully about their personal risk level given the pros and cons between fixed and variable rates.

“An option that borrowers can consider is diversifying their debt portfolio by using a combination of fixed and variable rates. This allows them to benefit from both types and to spread their risk over different time periods,” he said. “For example, a borrower could have a variable rate loan for a short-term project, and a fixed rate mortgage for a long-term investment.”

Rangasamy said diversifying also adds complexity to managing multiple loans or mortgages and may require more attention and monitoring. The interest rate cut is a good opportunity for farmers, agribusiness operators and food processors to take advantage of the lower borrowing costs, but he also cautions them to have a contingency plan in case of unexpected events or changes in the market.

“There are still risks with regards to both the global and domestic economies which, if they materialize, can have repercussions on Canada’s inflation and therefore interest rates. That’s why it’s important to stay informed, stay flexible and stay prepared,” he said.

–

alice.mcfarlane@pattisonmedia.com

On X: @farmnewsNOW

—

Ready to thrive?

Click on the ‘Lifestyles’ section in the menu bar or visit www.everythinglifetstyle.ca for health and wellness news, recipes, free guided meditations, gardening videos, and the ‘Choosing Wellness’ podcast.