The RBA increased the cash rate to 1.85% in August 2022. The rise comes a few weeks after Reserve Bank Governor Philip Lowe told the Australian Strategic Business Forum that they are experiencing a process now of constantly maximising interest charges. They also said that they have to take a step back from these extremely low-interest rates that they had during the emergency. The RBA said that they must expect 2.5% interest rates – how rapidly they get there based on inflation.
The RBA Governor has experienced increasing pressure over comments made in October 2021 recommending that interest charges would not increase until 2024. However, Australia is getting rid of the wages, the Delta outbreak, pricing pressure was subdued, and inflation was low. That all changed dramatically. Inflation is predicted to reach 7.75% in 2022. It is not expected to reach the RBA’s target inflation rate of 2% to 3% until the 2023-24 financial years.
The situation is worse in the UK with the Bank of England forecasting that inflation will reach approximately 13% within the next few months. The UK has been dramatically affected by the Ukraine war with a high rate of gas, compounding pressure from the post-epidemic supply chain problems and rate increases.
With the high-interest rates, what can we expect? Deputy RBA Governor Michele Bullock recently said that Australia’s household credit-to-income ratio is high at 150%, maximising an environment that allowed households to service levels of debt. She said the rise in housing rates over 2021 and 2022 has enhanced asset values for various homeowners, with housing assets including approximately half of household assets. The earlier downturn in house rates has only slightly eroded the high increases over earlier years. In addition to this, households have saved approximately $260m since the epidemic is building a buffer for increasing interest charges. However, it is a great view of the economy at large and businesses and individual households will experience different pressures based on their individual circumstances.
For businesses, the rate increase has a double effect. It is not only the rate increase and high price of funds in their borrowings. More effect comes from negative consumer sentiment and the effect on cash flow and sales.
- Your debt must not exceed approximately 35-40% of your assets. There will be allowances for these new first home buyers and business start-ups.
- Review cash costs in your business, reviewing rates, and the configuration and mix of loans to make sure you are not paying more than necessary.
- If possible, don’t take private debt, business and investment debts. You can’t get rid of your private debt.
Keep track of debtors, and don’t become your client’s bank.