The RBA lifted the cash rate to 1.85% in early August 2022. The increase comes a few weeks 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 went on to say that we should expect interest rates of 2.5% – how quickly we get there really depends on inflation.

Inflation is now forecast to reach 7.75% over 2022 before trending down. We’re not expected to reach the RBA’s target inflation rate range of 2% to 3% until the 2023-24 financial year.

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, if anything, it is the lesser issue. The more significant impact comes from negative consumer sentiment and the flow through effect on sales and cash flow.

• 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 or reduce 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.

As interest rates increase and consumer spending decreases it is even more important to closely monitor your business results and cashflow regularly and set budgets.

The team at McAdam Siemon can help you with this.