OCR hold but farmers warned to expect increases in the cost of borrowing

Federated Farmers is welcoming the continued hold of the OCR at 2.5 percent, though a more upbeat outlook means that farmers should plan for tightening as early as the fourth quarter with new bank lending requirements likely to increase the cost of borrowing before then.

“The hold is not a surprise although the more bullish outlook and a clear signal that tightening will come, possibly is,” says Philip York, Federated Farmers economic and commerce spokesperson.

“Well before the Reserve Bank begins a tightening of monetary policy, farmers may see an increase in the cost of borrowing. This is in response to new Reserve Bank capital adequacy ratios for farm lending.

“The cost of any increases will be watched closely by Federated Farmers.

“Given farmers will prioritise debt reduction in order to bank an increasingly bright commodities picture, we restate our firm belief commodity income will not be a threat to inflation.

“The bigger threat is on-farm inflation and Federated Farmers with the 4.1 percent increase in input prices for sheep and beef farmers, released by Beef+Lamb’s economic service last week.

“The big concern is that those outside the farm gate are anticipating windfalls that won’t come, as farmers grapple with gearing ratios and increasing costs of borrowing.

“While Federated Farmers is worried about the Kiwi dollar, it partially recognises a strong global demand for commodities. That said, the dollar is overvalued due to the Government’s borrowing programme and earthquake related reinsurance monies flowing into the economy.

“We must also appreciate the dollar’s strength is a weak European and United States economy story. New Zealand looks attractive for investors given we export what the world needs, agricultural products and minerals, including oil.

“The best way to bring down the dollar is for Government to constrain its spending and with it, the borrowing programme,” Mr York concluded.