How high will interest rates go?

At the beginning of August 2022, the Reserve Bank of Australia (RBA) increased the cash rate again to 1.85%.

The increase in the interest rates comes after Reserve Bank Governor Philip Lowe told the Australian Strategic Business Forum that “… we’re going through a process now of steadily increasing interest rates, and there’s more of that to come. We’ve got to move away from these very low levels of interest rates we had during the emergency.” He said that inflation directly impacts the interest rate, and we should expect interest rates of 2.5%.

There is significant pressure on the RBA Governor over comments he made in 2021, implying that interest rates would not rise until 2024. However, in October 2021 Australia lifted the government restrictions to control the spread of the Delta outbreak. During that time, inflation was low, and wage and pricing pressure was subdued. The scenario has changed a lot since October 2021; currently, inflation is now forecast to reach 7.75% during 2022 before reducing. The belief of the RBA’s target inflation rate range of 2% to 3% is far from reality, and it is not expected to reach this until the 2023-24 financial year.

The UK has had a significant impact from the Ukraine war; as a result the gas price has considerably increased. Also, the pressure comes from the post-pandemic scenario of supply chain issues and price increases. The situation in other countries is worse than in Australia; for example, in the United Kingdom, the Bank of England forecasts that inflation will reach around 13% in the next few months.

With higher in interest rates, what else can we expect? Deputy RBA Governor Michele Bullock recently affirmed that Australia’s household credit-to-income ratio is a relatively high 150%; in other words, it relates to the amount of debt that Australian’s holds to their overall income. “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 the household assets,” she said. Recently house prices have dropped, eroding the significant increases over the last years. Additionally, since the pandemic’s beginning, households have saved around $260m, creating a buffer for the current rising interest rates. This is overall of macroeconomy view, and everyone will face different challenges.

For businesses in Australia, the interest rate rise has a twofold effect. Not only the rise in interest rates but also the negative impact on consumer expenditure.

  • As a rule of thumb, your debts should not exceed 35-40% of your assets. There are some exceptions to new business start-ups and first home buyers.
  • Examine the cash cost in your business to ensure you are not paying more than you need.
  • Avoid private and investment debts because you cannot get tax relief on private debts.
  • Be aware of debtors to not becoming your client’s bank.
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