Rising Interest Rates

There has been a lot of commentary about interest rates, the Reserve Bank of Australia, cost of living and the general economic climate.

But what does that actually mean?

What are the implications for the economy, for business and for Australian households?

Key insights:

Australian Economy

The Australian economy continues to experiencing a very turbulent period.

In the midst of the Covid outbreak, the RBA considered that economic decline in 2020 would see a bounce-back in 2021, following Government stimulus measures.

However, the post pandemic recovery has been heavily influenced by factors such as rising costs of supplies & materials, transport & freight, supply chain disruptions, severe natural weather events, low unemployment numbers, forced business closures, business collapses, costs of living pressures, fuel costs and financial burdens - all contributing to overall uncertainty.

Despite its predictions, the RBA seemed to be surprised by higher tan expected inflation figures and has focused on getting inflation down.

In the last 14 RBA meetings, the central Bank has increased rates on 12 occasions. The current cash rate is 4.10%, increased from just 0.10% in April 2022.

Cost of Living

The reason for higher rates in Australia is to lower inflation. However, the criticism is that inflation is driven by "supply" rather than "demand". That is, the cost of food, health services, fuel, utilities (water, power, gas) has increased, supposedly because the cost to produce and supply those goods and services has increased and this is reflected in higher prices at the checkout.

According to the Australian Bureau of Statistics, there has been an increase in spending on "essential" items (food, transport, services), while spending on "discretionary" items (recreation, household goods, clothing) has fallen throught this year.

Borrowing

Previous research data suggests the majority of mortgage loan applications were for refinancing, and it is likely that this trend will continue as borrowers look for cheaper rates in a rising rate market.

For business loans and asset financing, interest rates are predominantly determined by international market markets and bank swap rates (the interest rates that banks use when lending to one another) which have been rising and continue to do so.

While local banks and finance companies have tried to absorb some of those rate costs, it has been inevitable that asset finance rates have increased. The outlook is for interests rates to continue to rise.