Interest rates are on the rise - should small business be concerned?

With the big four banks planning an interest rate rise out of cycle from the Reserve Bank, alarmists are suggesting an economic downturn is on the way. But is it really?
 
The truth is we have never had it this good in terms of continuous economic growth.
 
[BY] David Koch
 
Anyone who closely watches the economy will not be surprised by recent predictions that the 'Big Four' banks will buck the trend set by the Reserve Bank, to marginally raise their interest rates.
 
While the economy may be bubbling along nicely, there is a reason the Big Four are going to push an increase onto customers and it's simple: the cost of funding for financial institutions has gone up significantly.
 
There is a big gap at the moment between the 90-day bank bill rate compared with the cash rate. So, whilst the Reserve Bank has indicated it will keep cash rates steady for the immediate future, the banks will need to increase their rates out of cycle to cover the funding costs of their borrowings from the wholesale money markets here and overseas. This rate rise will flow onto business loans as well as home loans.
 
Before the tone of this article turns to misfortune and catastrophe, it's important to note when we're talking about these increases, it's likely to only be around 0.1 per cent. So, yes this will see a slight tightening of belts - but it's nothing for SMBs to get anxious about.
 
What we all need to remember is economies move in a cycle.
 
Remember there was the mining and investment boom which drove the economy for years? Everyone was scared of what would happen when that slowed. But once those mines were built they started pumping stuff out. And that is what caused the export boom we have at the moment. Then the housing boom and construction boom kicked in. That will start to flatten and reduce now because prices are coming down - particularly in the oversupply markets of Sydney, Brisbane and Melbourne - but the housing boom has given way to a new boom… the infrastructure boom.
 
Small business owners need to recognise there is no need for doom and gloom. We have an extremely resilient economy. Bad news might get the headlines and sell newspapers and get TV ratings, but the truth is, we have never had it this good in terms of continuous economic growth.
 
I like to call it the most hated period of prosperity in this country's history.
 
There is a perception that things are terrible, but the fact is there is record job growth, unemployment is low. But, you say, 'there must be something causing this negative perception?'  And you're right… Australians are asset rich and cash poor.

They've benefitted from big increases in property prices and superannuation from the share boom. But wage growth is low. And you can't eat your house or your super. So, everyone is feeling the pinch.
 
But let's put that 'pinch' into perspective. The Credit Suisse Global Wealth Report 2017 published on 14 November 2017 shows the average Australian is the second richest in the world, only trailing behind the Swiss. No Australian under the age of 42 has endured an economic recession as we continue our record breaking run of 27 consecutive years of positive growth.
 
Yet the psychology is a lot more negative than the reality…
 
So, what do these proposed interest rate rises mean?
 
I think it is a warning to say the era of cheap money doesn't last forever.
 
It shouldn't be a trigger to panic. It's important that any debt you have is good debt or productive debt invested in valuable assets and not expensive consumer debt like a credit card.
 
If there is one lesson to heed from this, it's you need to keep your debt under control.
 
 
 
As we have not taken into account your circumstances, please consider whether this information suits your needs. Go online for a PDS to consider before deciding. This information is provided by Retail Employees Superannuation Pty Ltd ABN 39 001 987 739 as trustee of Rest (Retail Employees Superannuation Trust ABN 62 653 671 394). Current as at July 2018.


 

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