The Bulletin

Reserve Bank of Australia’s (RBA) interest rate decision preview from CreditorWatch

  • Written by CreditorWatch CEO Patrick Coghlan


The RBA is once again preparing to make an announcement on interest rates. With Australia in the grip of a pandemic, this decision will have a profound impact on how well the economy withstands huge drains on resources. CreditorWatch CEO Patrick Coghlan offers this insight into what might happen.

If the rate stays the same
 
“Last month’s mini-budget announcement has shown the extent that our economy has been devastated by the pandemic. With 870,000 jobs lost between March and May, the Treasurer was right in outlining that our nation has a ‘mountain to climb’. Encouragingly, CreditorWatch data shows that businesses are cautiously optimistic - credit enquiries, a live indicator of business activity, have increased for two consecutive weeks and are currently sitting at pre-COVID levels.
 
“By maintaining interest rates today, this is sympathetic to the balancing act our economy faces. However, there is concern that by extending the likes of the government’s business stimulus packages, we are simply kicking the can down the road. Once the likes of JobKeeper, JobSeeker, Mortgage Holidays and Safe Harbour do eventually come to an end, there will be a seismic shock to the economy as companies will have to either fend for themselves or admit defeat. 
 
“With ten per cent of all businesses in Australia in danger of failing because of lack of cash, we could potentially end up seeing ten years’ worth of administration in the next six months. Therefore, I urge business owners to seriously ask themselves if their companies are going to be viable and if they’re unsure, they should seek advice sooner rather than later. Finance experts, restructuring specialists or bankers - they’re here to help.”
 
If the rate is lowered
 
“Last month’s mini-budget announcement has shown the extent that our economy has been devastated by the pandemic. With 870,000 jobs lost between March and May, the Treasurer was right in outlining that our nation has a ‘mountain to climb’ - today’s interest rate cut is a logical reaction to this.
 
“Whilst this decision will encourage liquidity in markets and keep business transactions and investment flowing, my fear is that there are already too many companies that are likely to fold that haven’t done so yet. Low lending rates and the extension of measures such as JobKeeper, JobSeeker, Mortgage Holidays and Safe Harbour are kicking the can down the road. When these do eventually come to an end, there will be a seismic shock to the economy as companies will have to either fend for themselves or admit defeat. 
 
“With ten per cent of all businesses in Australia in danger of failing because of lack of cash, we could potentially end up seeing ten years’ worth of administration in the next six months. To put that into perspective, we typically, in ‘normal circumstances’, get around 9,500 administrations a year. It would be completely catastrophic. Therefore, I urge business owners to seriously ask themselves if their companies are going to be viable and if they’re unsure, they should seek advice sooner rather than later. Finance experts, restructuring specialists or bankers - they’re here to help.”

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