In the Know: Impending Interest Rate Cuts

The Federal Reserve is expected to cut interest rates mid-month, which will bring a number of changes that impact lenders and their borrowers. 

Lower rates can help stimulate economic growth, with reduced borrowing costs and boosted investments. They can help improve cash flow for borrowers with lower interest payments. They can also help banks maintain liquidity, as they can borrow at a reduced cost. 

While the benefits are encouraging, there are also some potential risks for lenders and their borrowers. Excessive borrowing when rates are low can lead to financial instability when rates eventually rise. Low rates can also create an illusion of economic growth that’s reliant on debt, which isn’t sustainable long-term. 

Here are a few key considerations to keep in mind with lower interest rates around the corner: 

• More competitive loan products: A rate cut typically reduces lenders’ costs of borrowing; in turn, ag lenders can typically lower their lending rates, making their loan products more competitive. 
• More loan applications: When interest rates lower, borrowers will likely look to take advantage of cheaper credit, which often leads to an increase in loan demand. As a result, agriculture lenders might see more interest in land, equipment, and operational loans.
• Increased cash flow: For existing loans with variable rates, borrowers may see their interest payments decrease, freeing up cash flow for operational expenses or reinvestment and will turn to their lenders for guidance. 
• Market sensitivity: Agriculture borrowers are heavily affected by commodity prices and market conditions, and lower interest rates can stimulate the economy and increase demand for commodities, benefiting farm revenues. That said, borrowers must also be cautious of long-term volatility; future rate hikes could increase their debt servicing costs. Lenders should be prepared to help their clients with scenario planning. 

The Agri-Access team is here to help answer questions as you prepare for potential interest rate cuts. Contact a relationship manager today to start the conversation.