The RBA Board held the cash rate unchanged at 4.10% in early July - as we had expected. The statement from the RBA noted three key reasons for leaving the cash rate unchanged.1
- “Interest rates have been increased by 4 percentage points since May last year”. At 4.10% we see the cash rate as being deeply restrictive, based on housing debt servicing costs as a share of income. The RBA expects the economy to keep growing, but references to an even keel have been dropped.
- “The monthly CPI indicator for May showed a further decline”. The monthly CPI decelerated to 5.6%/yr in May from 6.8%/yr in June. We had expected the Board to respond to this softer inflation print by leaving the cash rate on hold. Especially after the RBA responded to upside risks to inflation post the stronger April CPI by lifting rates at the June meeting in a surprise move. The statement makes reference to the RBA remaining alert to high inflation, but has removed reference to upside risks.
- “The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the economic outlook and associated risks.” We had expected the Board would want to hold the cash rate steady and wait for more information after lifting the cash rate in both May and June, following the pause in April. Crucially Q2 23 CPI is released ahead of the August Board meeting and will provide the RBA a full assessment of the inflation picture - given the inherent volatility in the monthly CPI.
Importantly the forward guidance on monetary policy from the RBA was unchanged from what was used in both May and June. The same sentence “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve” was retained in July. This forward guidance was followed by “the decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the economic outlook and associated risks”. The same developments; the global economy, trends in household spending, forecasts for inflation and the labour market were again highlighted.
We continue to expect a monetary policy easing cycle to get underway in early 2024, with the cash rate forecast at 3.6% by year-end 2024.
There has been a material lift in the cash rate since May 2022. Although still relatively low by standards seen before 2012, the 4.1% rate is the highest cash rate since March 2012. The increase in the cash rate since May 2022 represents a big change from the record low 0.1% cash rate in place throughout 2021. Rising interest rates are also being accompanied by other cost of living pressures, with inflation still too high (albeit it has peaked). The annual inflation rate eased to 7.0% in the March quarter 2023. The new monthly CPI Indicator for May did show a further fall in inflation to 5.6%/yr and confirms inflation is past its peak. CommBank’s Economics team expects headline inflation to fall to 3.8%/yr in Q4 23, before returning to the RBA’s inflation target band in 2024. This fall in inflation assisted by the material lift in the cash rate will come at the cost of a much slower economy. 1
For brokers, this is an opportunity to support your customers by providing the expert guidance they’re looking for, helping them put the right finance in place while managing repayments and cash flow.
The impact on your customers
The impact of higher inflation and rising interest rates may be extensive over time. Here are some of the ways your customers could be affected, and how they could respond.
Expenses
Inflation has meant higher costs for stock and raw materials, potentially putting margins under pressure. Utility costs rose over 2022 and have continued to rise in 2023.
How business owners can respond
- Closely monitor and control costs
- Stress-test financial forecasts to ensure they can successfully navigate a higher cost environment
- Review prices to ensure they reflect cost increases and protect margins
Reduced sales
Consumer spending has moderated and CommBank’s Economics team expects a further slowdown over the remainder of 2023 and into 2024. CommBank credit and debit card data to the end of May 2023 indicates a further slowdown in the pace of annual growth after a holiday induced bounce earlier in the year. Household consumption growth slowed to just 0.2%/qtr in Q1 23. Household spending per capita declined in the quarter even as the savings rate fell further. Household budgets are under pressure from inflation and from rising interest rates. Dwelling prices rose by 1.1%/mth across the nation in June, the fourth consecutive rise, led higher by Sydney and Brisbane. Dwelling prices bottomed at a modest -10% peak-to-trough in this cycle. We expect dwelling prices to rise 3% in 2023 and a further 5% in 2024, risks to the upside. 3
How business owners can respond
- Closely monitor revenue, including spending by different customer segments.
- Look for opportunities to focus on higher-margin products and services.
- Use our Daily IQ tool for insights on their customer demographics, the local economic outlook and potential areas for growth
Cash-flow pressure
Subdued consumer spending and rising costs have the potential to put some businesses under cash-flow pressure, especially if there is a timing mismatch between inflows and outflows. That may mean they need to increase the level of working capital they hold within their business or put finance in place to meet unexpected expenses.
How business owners can respond
- Create or update their cash-flow forecasts
- Use our Business Cash Flow View in the CommBank app to see monthly summaries of their incoming and outgoing cash at a glance
- Review their finance arrangements and, if necessary, establish an overdraft, line of credit or other short-term finance facility
How you can help them respond
Faced with this changing business environment, many business owners will be looking for guidance on the market outlook and how to adjust. You can turn these rates conversations into relationship-building opportunities by giving your customers the support they need, helping them futureproof their businesses for a rising rates cycle.
Here are three ways you can support your customers.
1. Help them plan ahead
For most businesses, the first step is to create or update cash-flow forecasts, ensuring they can continue to trade profitably as rates rise. You can support business owners by helping them to:
- Understand the interest rate and inflation outlook and its potential impact on their expenses
- Stress-test their forecasts for different interest rate and inflation scenarios
- Model possible responses, including price increases, and identify trigger points
2. Explain their repayment management options
CommBank’s finance solutions come with a range of features your customers can use to tailor their repayments and their loans as their business situation changes. Here are some options your customers may want to consider, depending on the type of finance they have in place:
- Switching to a fixed interest rate so they can plan ahead with certainty and protect their business from any future rate increases
- Switching to interest-only payments to reduce cash-flow pressure
- Adjusting their repayment schedules or using a flexible facility, such as a line of credit, to match repayments to cash flow
3. Help them create a cash-flow buffer
Having extra working capital on tap can help your business customers safeguard against unexpected cost increases so they can continue to meet current expenses while they adjust. Here are some options to consider:
- With a variable rate BetterBusiness Loan, customers can use any spare cash to make extra repayments, reducing their interest costs, then redraw funds when they need them
- A Business Overdraft can help customers access funds instantly when then need them, then repay them at their own pace, while only paying interest on the amount they use.
We’re here to help
For more information, talk to your CommBank Business Development Executive or visit commbankbrokers.com.au
