The RBA lifted the cash rate to 1.85% in early August this year with the increase coming a few weeks after Reserve Bank of Australia (RBA) Governor Philip Lowe said that interest rates are going through a steady increase and that we should expect interest rates as high as 2.5%. However, inflation will determine how fast they change.
After this increase, the RBA Governor has come under pressure over comments made in October 2021 suggesting that interest rates would not rise until 2024. However, at the time, Australia was coming out of the Delta outbreak, wage and pricing pressure was subdued, and inflation was low (which we all know changed very quickly).
Inflation is now forecast to reach 7.75% over 2022 (before trending down), so we’re not expected to reach the RBA’s target inflation rate range of 2% to 3% until the 2023-24 financial year.
So with interest rates rising, what is currently happening?
- Our household credit-to-income ratio is a relatively high 150%, increasing in an environment that enabled households to service higher levels of debt
- Strong growth in housing prices over 2021 and early 2022 has boosted asset values for many homeowners, with housing assets now comprising around half of household assets
- Households have saved around $260m since the pandemic creating a buffer for rising interest rates (this is a macro view of the economy at large and individual households and businesses will face different pressures depending on their individual circumstances).
How do these rates affect businesses?
For businesses, the rate increase has a twofold effect. It is not just the rate rise and the higher cost of funds in their borrowings. That by itself is significant but at this stage, it is the lesser issue. The more significant impact comes from negative consumer sentiment and the flow through effect on sales and cash flow.
Here is what businesses can do:
- In general, your debts should not exceed around 35-40% of your assets. There will be some exceptions to this with new business start-ups and first home buyers.
- Review the cost of cash in your business, reviewing rates, and the configuration and mix of loans to ensure you are not paying more than you need to.
- If possible, avoid having private debt as well as business and investment debts. You can’t get tax relief on your private debt.
- Keep an eye on debtors and don’t become your customer’s bank.
For individual advice on how high interest rates will affect your business, finances and accounts, contact your Aintree Group advisor today!