The Reserve Bank of Australia (RBA) raised the cash rate at its Board meeting on Tuesday 3 May. The decision comes after many months of commentary about the central bank acting on rates to curb surging inflation. While the decision to raise the rate from the historic low of 0.1% was highly expected to occur in May or June, what is probably most notable for businesses is that additional interest rate rises are also extremely likely.
The timing of the rate rise being mid-campaigning for the Federal Election was seen by some as ‘interesting’ but in fact, the RBA has moved on rates during an election campaign previously. But what was quite significant was the size of the increase. It was evident to many economists and analysts that the bank would act soon to restore the drastic rate cuts made during the pandemic. But there seemed to be a general opinion across the finance sector that the bank would make several smaller rate rises.
But the bank acted with a 0.25% increase to put the cash rate at 0.35%. This is the first increase in the cash rate in 12 years and is in line with what is happening in other global economies. The US Federal Reserve also recently increased its central rate but by a much larger 0.5%.
For business owners the major concern with the RBA move and even more interest rate rises is the effect on equipment finance and the outlook for the economy moving forward. Effects which may impact their equipment acquisition and investment decisions.
The RBA issues statements to announce Board decisions regarding rates. These statements include the reasoning behind the outcomes and also include central forecasts for key economic indicators and the outlook for the economy. We have reviewed the May RBA Monetary Policy statements and provides this overview of key inclusions which we see of interest to business owners and operators.
RBA May Monetary Statements: Key Inclusions
There are a number of major take-outs from the RBA Board’s May statement around the decision to lift the official cash rate to 0.35%. The Board states that the timing was seen as appropriate to commence withdrawing the support provided to the economy through low interest rates during the economic crisis of the pandemic. The RBA frames this situation as ‘normalising’ monetary conditions.
Conditions in 2020 with the onset of the coronavirus pandemic were ‘extraordinary’ and now as the economy has bounced back to target levels, the scenario is right to return interest rates especially to more normal rates.
In the statement, the RBA notes the resilience of the Australian economy in recovering faster than expected. This has also caused inflation to pick-up at a rate faster than the central bank has expected. This is the explanation provided for the dramatic change in timing for a rate rise.
In many statements issued following Board meetings through 2021, the RBA had indicated that it forecast conditions to be right for a rate rise in 2023 or 2024. The faster rate of Australia’s economic bounce back has seen that timeframe expedited to May 2022.
Wages growth has also been included in discussions around conditions right for a rate rise. The RBA states it has evidence from business surveys and other data that wages growth is picking up. This seen as especially evident in increases in wages in private sector enterprises.
Unemployment figures and the rate of inflation are the major economic data that have been indicated by the RBA as key to any decisions to increase the cash rate. Unemployment has now dropped into the target range, sitting at 4%. The RBA forecasts this rate to drop further into the 3.5% range by early 2023. This rate, it states, is the lowest in around 50 years.
The economic growth outlook is seen as positive by the RBA, albeit with uncertainties in regard to a number of global issues. These include the war on Ukraine, ongoing pandemic-related disruptions especially in China at the moment as well as inflation being high in many economies.
On the domestic front, the business sector investment is continuing well and the pipeline of work ib the construction sector mentioned as a positive indicator for growth.
The surge in inflation in Australia is still lower than in many other advanced economies. The surge is related to both global and domestic pressures. The RBA central forecast is for inflation to rise to 6% with an underlying inflation rate of 4.7% this year. It sees the rate moderating to 3% by mid-2024.
A significant note is that the RBA says the forecasts provided for inflation are based on the assumption of further interest rate rises. An important statement for businesses to note when scheduling investment acquisitions in the future.
In closing, the RBA Board statement states the bank’s commitment to doing what is required to see the inflation rate return to target. This, it states, will required additional rate rises to achieve.
Flow on Effects for Equipment Finance
The flow-on effect of RBA rate rises is increases in interest rates in lending markets. The CBA was one of the first of the Big 4 to respond by raising home mortgages by the 0.25%. Lenders in other sectors and loan products such as for equipment finance will also reflect the RBA rate rise as lenders adjust their rates accordingly.
We have our current lowest available rates displayed for our finance products as a handy reference and planning tool for business operators. The rates offered on equipment finance will vary for different industry sectors, the age and condition of the machinery and the loan application details including the credit profile of the business.
The timing of the RBA’s move to increase rates from 2023/24 to 2022, may have impacted business investment timing. A situation which now needs reviewing in order to secure cheap interest rate finance before rates rise again.
We will of course be continuing our policy of better interest rates to secure cheaper finance for our customers. An outcome we are well-placed to achieve through our multiple accreditations including with specialist non-bank lenders.
The RBA Board next meets to make decisions around the cash rate on the first Tuesday in June.
Contact Jade Equipment Finance on 1300 000 003 for a quote on equipment finance
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR.