In the latter part of 2019, most businesses had a stable landscape with low inflation and low interest rates. We were all just cruising along in what was, for the most part, a good environment and the usual challenges of day-to-day business.
By March 2020, COVID-19 was in full swing, with the world bracing for a full pandemic and sentiment in Australia fearful of our economy collapsing and a 15% unemployment rate. The Australian government recognising that private enterprise (small business) was the backbone of the economy, employing over 95% of the population, they needed to take swift and significant action. This included immediately implementing job keeper, cash grants and massive tax depreciation incentives in the form of the TFEDA as well as the RBA dropping the cash rate to the lowest on record at .1%.
The next 12 months were an absolute rollercoaster, with various states in and out of lockdown. Industries in tourism, travel and hospitality were decimated, however many other industries survived reasonably well, especially with the assistance of job keeper and others busier than ever.
18 months in with an increasingly vaccinated population, community sentiment was becoming reasonably positive. Many working from home, an inability or reluctance to go out or travel plus very low interest rates resulted in much of the population having an increasing amount of cash and savings. This optimism, buoyed by the very low interest rates saw a boom in house values and a substantial increase in spending from consumables to recreational assets & home renovations (big & small). Bunnings had never been so busy.
24 months in (June 2021) we start to see the early signs of inflation. Much of this being compounded by demand exceeding supply in labour, components, and product.
The shortage of labour, driven through the absence of our usual overseas workforce (some 200,000) started to bite, placing upward pressure on wages. Add that to the lack of imported products due to supply issues, as well as competing demand from other countries (further exacerbated by the China lockdown, shipping issues and the Ukraine war) spiked the cost of many items, from electricity & fuel to food, products and raw materials which substantially increased, particularly in the building and construction industry.
Inflation had arrived big time!!
It was time to hit the brakes & the biggest brake used by governments to slow inflation is to increase interest rates. Already, we have seen the early “Economy Cooling” results of the home loan interest-rate increases with market experts predicting a 30 to 40% slump in home lending as a direct result of those recent interest rate increases.
The reality is that the harder you hit the brakes, the sooner you slow down the inflation, however if you hit the brakes too hard, you risk stalling the economy, which can lead to a recession. The RBA will need to closely monitor this to get the balance right.
As a side note, the “coal face” effect of the interest rate increases is far more significant for home loans than it is for equipment and motor vehicle finance.
So how long can we expect these increases before we reach the peak?
The best intel we can see at this stage, is around 12 – 18 months, or when inflation returns to the 2 to 3% band required by the RBA to stabilise inflation to an acceptable level. Once this band is achieved, we can expect interest rates to remain at the level required. However, if inflation drops below this desired band, we can reasonably expect to see some reduction in those interest rates to ensure Australia has a soft landing and avoid a recession.
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