The RBA lifted the official cash rate again at its September Board meeting with the 50 basis points hike having potential implications for business finance. Businesses already feeling the effects of rising costs and labour market pressures may now be facing higher interest rates across a range of business finance products. The decision highlights the need for business owners to focus on achieving cheaper interest rates and more amenable conditions when sourcing a range of loans. The outlook for rates can be important considerations for those intending to invest in new asset acquisitions or are requiring finance to support and grow the business moving forward. The statement issued by the RBA Governor following the 6 September Board meeting offers some indication of the RBA’s rationale and intentions re further rates. Governor Lowe further elaborated on this matters and other issues in a speech delivered in Sydney on 8 September. These documents can be worth reviewing for business owners to stay updated on the economy, inflation and interest rates in order to better plan major purchases with finance. September Decision by RBA Board The decision by the RBA Board at its September meeting is highly significant from a number of perspectives. The 50 basis points hike is the fifth consecutive rise in the cash rate. The 0.5% for September follows the same amount in June, July and August and the more modest 0.25% rise in May 2022. The May increase being the first in over a decade. This run of rises has lifted the cash rate from the record low 0.1% which was held from November 2020 through to that first rise in May 2022, to the current level of 2.35%. As noted by many analysts, this is the highest the cash rate has been for 7 years. In making the recent decision and announcing the latest rate rise, RBA Governor Lowe reconfirmed the Board’s commitment to, over time, returning the rate of inflation to target which is 2-3%. The current rate being 6.1%. While pursuing this target, the RBA is aiming to find the fine balance with maintaining the economy in a stable position. Governor Lowe notes that there is a narrow way through to achieving the balance with uncertainties emanating from global issues. As stated previously, those global issues are in regard to the situation emanating from the war on Ukraine, the pressures being felt on incomes from central banks increasing interest rates and the high global inflation rates. Issues emanating from the Chinese approach to containing its recent COVID outbreaks is also seen as impacting supply chains. The Board notes that inflation is at the highest since early 1990s and the expectation is for it rise further in coming months from the curent6.1% to 7.75%. The expectation from the RBA is for it to fall from that peak in 2023 to around 4% before approaching the 3% target in 2024. One the domestic scene, the demand and supply imbalance is identified as contributing to the soaring inflation. As has been noted previously, the low unemployment rate of 3.4% continues to highlight the tightness in the labour market. This tightness is restricting many businesses from operating to capacity which is resulting in supply issues. On the demand side, consumer spending is strong as shown by recent ABS data. This imbalance is putting pressure on prices and driving inflation. Governor Lowe has stated that the Board will paying close attention to how business behave with setting their prices with the labour situation. Consumer spending behaviour is noted as another uncertainty and while households are under cost pressures, work is being found and the RBA sees households with good balance sheets. Though the full impact of increased home mortgages due to rate rises is get to be felt. In regard to further interest rate increases, Governor Lowe points out that the Board is not following a pre-determined plan or path. Decisions, he said, will be guided by the data as it comes in. But, further rate rises are to be expected. Business Finance Implications The rapid rise in the cash rate, which some analysts have described as the most aggressive approach ever taken by the central bank, would have come as a surprise for business operators that may have slipped into a sense of complacency with the historic and exceptionally cheap rates available during the pandemic. But, as some commentators have noted, those historic lows were not normal. The RBA is now normalising rates as the support provided during the pandemic is no longer seen as required. So businesses need to also ‘normalise’ their thinking in regard to finance. While the record rates are consigned to history, cheaper business finance interest rates are still available through Business Finance Australia. If considering new asset acquisitions, sourcing the cheapest rate finance through us rather than a higher rate through another lender, may make the purchase more realistic, achievable and affordable. Even a slightly higher interest rate can represent a considerable additional cost to the overall acquisition when computed over the full finance term. While finance which has been secured at a fixed interest rate will not be impacted by the latest RBA rate rise, commercial loans with a variable rate may be impacted. If the increases in rates and repayments create pressure on cash flow, contact us to discuss refinancing and other possible solutions. Contact Business Finance on 1300 000 033 to discuss the commercial loans options to address labour shortage issues for business. 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