Jack McNamara
Director - Financial Planning
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The interest rate rollercoaster – how to hold on!

As interest rates continue to rise, along with inflation, what can we expect and how do we keep holding on through the twists and turns?

The Reserve Bank of Australia (RBA) recently lifted the cash rate to 2.35% on 6th September 2022. The RBA Governor informed us 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 will depend 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.

With interest rates rising, what can we expect?
The RBA recently stated that inflation is expected to peak later this year and then decline back towards the 2–3 per cent range. The expected moderation in inflation reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.

We recently spoke with Ross McLachlan, Commercial Finance Broker from MCP Financial Services on what to expect. “Customers should continue to plan for an increase in their repayments, especially for those coming off fixed rates. Appetite for new lending remains sound and credit providers are still looking to work with customers in a paradigm of higher assessment rates and some uncertainty around property values. It is prudent for borrowers to sensitise interest rates for new projects or asset purchases just so they are aware of the impact that increasing interest rates will have on their cash flow. Interest rates, from a historical viewpoint, are still relatively low though.” He said.

It is important to be aware that interest rates could still rise higher, and you should continue to plan with this as the expectation.

For businesses, the rate increase has two major areas to be prepared for:

1. The higher cost of funds in their borrowings.
2. The potential for negative consumer sentiment and the flow through effect on sales and cash flow.

For individuals, whilst the consideration for navigating the rise may be different to businesses, the steps for management could be the same.

So what’s the best way for us to hold on as we ride this rise?

  • Review your budget of expected income and expenses, (including future lump sum expenses) to factor in the impact of higher interest costs. Apply an extra 1.5% to your rates, including potential fixed loans about to expire, in your budget planning. Make changes to spending if required now to avoid difficulty in the future.
  • Speak to your mortgage broker or banker about loan rates and the structure of these.
  • Keep on top of debt repayments and avoid borrowing the maximum the bank will allow to avoid further pressure if interest rates rise above RBA and market expectations.
  • In business, consider reviewing your pricing structure if needed.
  • Ultimately, now is the time for planning.

For further information please feel free to contact us and speak to one of our financial planners.

Recent RBA media release.
This information has been produced by Jack McNamara, an Authorised Representative of Personal Financial Services Limited (ABN 26 098 725 145), of Level 10, 88 Philip Street Sydney NSW 2000, AFS Licence no. 234459. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. West Carr & Harvey Financial Planning is a registered tax (financial) adviser and any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and PFS and its related bodies make no representation as to its accuracy or completeness. Published: August 2022 © Copyright 2022