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Business Advice

How High Will Interest Rates Go?

Economists are predicting that the cash rate will increase to somewhere between 3.10% and 3.85% in the first half of 2023 and then remain stable until early 2024.

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Low-interest rates have been a mainstay since the global financial crisis of 2008. When the pandemic hit, Governments pushed stimulus measures through the economy, and central banks reduced interest rates even further.

After COVID, housing market demand was strong, and prices boomed. Still, supply chains remained restricted at the same time, and the problems were amplified by geo-political tensions increasing input costs. Supply could not keep up with demand to support the recovery, pushing inflation higher and broader than expected for longer. Central banks have responded by tightening monetary policy and lifting interest rates to control inflation.

But the good news is that inflation is likely to ease.

Following the US trends

Inflation in the US has started to decrease from a high of over 9% in June 2022 to 7.7% in October, suggesting that interest rates may not rise as high and as aggressively as expected.

Similarly, in Australia, the Reserve Bank of Australia (RBA) Board raised the cash rate by 0.25% to 2.60% at its October 2022 meeting, a lower increase than many expected. The lower-than-expected rise suggests that inflation pressures, particularly wage growth, will be more subdued in Australia than overseas. Comparatively, Australian households are more sensitive to interest rates, with more than 60% of mortgage variable rate loans. Unlike the US, where most borrowers are on 30-year fixed loans.

The increase in interest rates is starting to take effect, helping restore price stability. However, in its statement, the RBA said that it would be a challenge to return inflation to 2-3% while at the same time “keeping the economy on an even keel.” It concluded that achieving this balance is “narrow and uncertain.”

In housing, the correction in house prices deepened and broadened across Australia, with capital city prices falling by 1.4% in September 2022, rounding out a 4.3% decline over the third quarter. Housing finance approvals continued to mirror the broader correction, with further decreases across investor and owner-occupier loans.

So, where does all of this leave us?

Inflation will stay higher for longer than initially anticipated. As a result, interest rates are expected to continue to increase, albeit slower, with the RBA resetting its view along the journey. Economists predict that the cash rate will increase to between 3.10% and 3.85% in the first half of 2023 and then remain stable until early 2024 before RBA policy pivots and interest rates lower in early 2024.

Canstar analysis suggests a 3.85% cash rate translates to an average variable rate of 6.73%. The difference between a 5.73% variable rate mortgage and 6.73% is $650 monthly on a $1 million, 30-year mortgage.

Talk to an accountant about managing cashflow

It’s always best to seek advice from your trusted advisor and accountant to help manage cash flow and reduce any waste in a business affecting profit margins. Contact Clout Advisory on 02 6650 5888 for guidance on managing inflation’s impacts.

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