Many financial institutions are only now beginning to understand the implications of changes to Australia’s cash rate. While it is a topic most business owners will not have time to research right now, this article aims to prepare you for future opportunities and challenges.
Whether you’re an accountant looking for guidance on your next quarterly taxes or a business owner who needs help making strategic decisions, knowing more about these topics can be useful. In this article, we cover the changes to Australia’s cash rate and how it will effect financial institutes/ loans. We also address potential implications and how you can stay ahead of this changing landscape as a business owner or employee. Read on to learn more.
The cash rate, or “RBA rate”, is the interest rate at which banks borrow money from each other. The cash rate is set by Australia’s central bank and will often change in response to economic factors such as inflation, employment, and GDP growth. The cash rate is important because it can affect things like mortgage rates, savings account interest, and even the return on your investments.
If you have a business, the cash rate can also have an impact on factors like your cash flow and projected profit. The cash rate is relevant to businesses because it can affect many things, including the amount of interest you’re charged for a business loan. If the cash rate increases, it will make it more expensive for banks to borrow money, which means they’ll charge you more for your business loan. In this situation, you may want to consider refinancing your loan to take advantage of lower interest rates.
The cash rate was raised by 25 basis points to 0.35% during the Reserve Bank of Australia’s May 2022 meeting. Further in June, the RBA board at its regular monthly meeting lifted its cash rate target 50 basis points to 0.85%. It is anticipated that is will increase further in next 6 months.
Rates haven’t been raised since November 2010 but for the first time in several years we will see a continued protectory, and the Reserve Bank has said it will continue to rise as it attempts to control rising prices. The central bank said that the economy has been sturdy while inflation has risen more rapidly, and there is also proof that wages are rising. The Australian economy is expected to grow by 4-1/4% in 2022 and 2% in 2023, it said.
Meanwhile, household and business balance sheets are in good condition, business investment is on the rise, and there is a big pipeline of construction work that must be carried out. In 2022, headline inflation will be around 6% and underlying inflation will be around 4-3/4%, decreasing to around 3% by mid 2024. In addition, the Exchange Settlement account interest rate has increased from 0% to 25bps.
The factors that influence the cash rate in Australia are similar to those that influence the Federal Funds Rate set by the U.S. Federal Reserve. These factors include economic growth, unemployment, inflation, and the fed funds rate. While the specific factors may be different, the general idea is the same. Economic Growth – If the economy is doing well (i.e., there is low unemployment and high GDP growth), there is less demand for credit. This means that banks don’t have to charge as much interest on loans because they don’t have to be as careful with their money. If the economy is doing poorly (i.e., there is high unemployment and low GDP growth), banks have to be more selective about who they lend money to. This means that they’ll charge higher interest rates on loans so that they can be extra careful with how they spend their money.
If the cash rate increases, banks will charge higher interest rates on loans and reduce the amount of loans given out. This means that it will be more difficult for businesses to find a loan, which can negatively impact cash flow. Take note that these loan rates also apply to individuals who are looking to refinance their mortgage or other types of loans. If you have a loan or have borrowed money, you should be aware that higher rates could impact your monthly payment and could have a significant impact on your finances.
Note that if the cash rate decreases, banks will charge less interest on loans and give out more loans. This can have a few positive effects. First, it could make it easier for you to find a small business loan because banks will be more eager to lend money. This means you can get the funding you need to expand your business, hire employees, or otherwise make your operation more successful.
The cash rate is a very important factor in the Australian financial system. Although it may not be the most exciting part of the Australian economy, it is certainly one of the most important. It sets the tone for commercial banks and their willingness to lend money. If you are looking to expand your business or borrow money, it is important to keep an eye on the cash rate.
Capify is a great alternative option for traditional lenders since banks has been tightening up their lending criteria. We are continuing to keep our rates competitive in order to cater for small business requirements.
If you are in need of further financial assistance or advice, let us know, and we can help with getting you the right funding. Call 1300 760 930 to talk to one of our friendly loan specialists or Get Started here.
Capify does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.