The economic crisis that we are all facing is making a lot of people rethink what they are doing. With interest rates increasing Adam Humphreys Director of Finance at LZR Partners has some comments on how it happened and how it may end.

The overspend economy.

I believe we have had an overspend economy. I just look where I live in Eltham and I go back to when I first moved out there, it was Commodore and Falcons, and now it’s BMW, Mercedes, and Porsches. Where is all this money coming from? I’ll tell you where it’s going, it’s gone. It’s gone directly out of the pocket. People are feeling that squeeze.

Pre-COVID economy.

I think things were easy pre-COVID, we had low rates, and employment was good. COVID caused some issues, but post-COVID and what’s happened with the global situation, CPI, no one saw it coming and it’s hit so quickly. In today’s environment take a $1,000,000 loan and you’ve had rates increase by 3%. That is $30,000 more in interest you must find to pay for your loan. That’s a huge amount coming out of a “Mum and Dad” budget. It’s not easy out there.

The light at the end of the tunnel.

Everyone is saying that the CPI needs to come down. Once that starts to happen interest rates are likely to follow at some point. The low rates of a few years ago, that were in the twos, we’re not going to see that again for a long time. Then throw in what happened with the Russia-Ukraine conflict and that’s flowed on to oil prices and all sorts of things.

The global supply chain. To get goods out of China is taking twice as long. So, the input costs are going through the roof in manufacturing and retail. Until those issues settle down we are unlikely to see interest rates come materially back. Market indications are that an interest rate reduction is over 12 months away from now, and the CPI hopefully will come down, but you’ll see a time lag in terms of rates coming back.

Probably not this year.

So, unfortunately, this year I don’t think we’ll see rates come back. If anything, in the first quarter of 2023 rates will continue to go up, but hopefully this plateau’s and then into 2024, we’ll see rates come in a bit. But hopefully, by then everyone’s done things to manage their commitments and cash flows.

My advice is don’t sit and wait because it will come back to bite you.