After months of speculation and discussions among economists, analysts, and experts, the RBA Board has finally taken action during its May 2022 meeting. The Reserve Bank of Australia (RBA) decided to raise the cash rate from 0.1% to 0.35%. This move marks a significant event as it's the first time in 12 years that interest rates have experienced an upward adjustment. For owners of heavy vehicles and operators in the transportation industry, a key concern following the RBA's rate hike is the potential impact on truck loan interest rates.
The 0.25% increase was larger than anticipated by some experts. However, it's important to note that the RBA has indicated that further rate increases are on the horizon. To help business owners better understand the current interest rate landscape, we offer a summary of the statements issued by the RBA in conjunction with their latest decision.
The RBA issues two documents when announcing the outcomes of the Board meetings on rates – a document laying out the rationale and outlook plus the transcript of the Governor, Dr Philip Lowe’s speech regarding the decision. We present excerpts from each of these to provide a better understanding of the reasons behind the rate rises and what could be expected in the coming months and into 2023.
Monetary Statements by the RBA
In making the decision to increase the cash rate by 0.25% on 3 May, the RBA Board considered the timing was right to begin the process of withdrawing some of what it describes as ‘extraordinary monetary support’ provided to the Australian economy through the pandemic. The RBA describes this process as ‘normalising’ the monetary conditions.
By ‘monetary support’ the RBA is referring primarily to the reductions in the cash rate made during 2020 which resulted in historic low interest rates. Conditions which were clearly extraordinary and far from normal.
The RBA said the economy had proven its resilience and that the rate of inflation had picked up faster and at a higher level than had been expected. It also stated that it had evidence that there was a pick-up in wages growth.
Inflation and unemployment have been the two key economic indicators referred to by the RBA as targets it was watching in regard to moving on interest rates. The current 4% unemployment rate is in target range and the forecast is to decline further to the range of 3.5% in the early part of 2023. When achieved, this would represent the lowest unemployment rate in Australia for the past 50 years.
The RBA sees the economic growth outlook as positive, however, it also sees uncertainties as a result of issues in the global economy. Particularly mentioned were the Ukraine situation, ongoing COVID-19 issues especially the increase in cases and resultant lock-downs in China, and high inflation in many countries.
Investment by the business sector is proceeding and the construction sector in particular has a significant pipeline of work which is yet to be completed.
As mentioned, the rate of inflation has increased more quickly and significantly than had been expected. Having said that, the RBA notes that the rate in Australia remains much lower than the rate recorded in many economies.
The rise in inflation is put down both global pressures and domestic pressures. The central forecast by the RBA for inflation is 6% with 4.75% underlying rate in 2022 and by the middle of 2024 to moderate to around the 3% mark. The statement states that these inflation rate forecasts are based on a key assumption that additional interest rate increases will occur.
The Board further stated its commitment to acting as required to ensure that the rate of inflation does return to the target levels. It says that to additional increases in interest rates will be required to achieve that target.
In the transcript of Dr Lowe’s address, there is an explanation of the timing and why it differed so significantly from the Board’s previous forecast of 2023-24. Interesting reading for those keen to get the detail. In short, the economy has improved much faster than expected and that has brought forward the earlier time frames.
Significance for Truck Finance
To the nitty gritty and what this means for operators looking to invest in new truck loan products in the future. The cash rate set by the RBA is a bank-to-bank lending rate that does form essentially the basis from which lenders will set their rates in sectors such as heavy vehicle finance.
The general response will be for lenders to increase their lending rates across their markets. By how much will depend on their individual guidelines. As far as the position of Jade Truck Loans, we are committed to the continuation of our better interest rates policy.
We will see truck loan interest rate rises by our lenders. This would be expected across the range of truck loan products. But as we are accredited with multiple lenders, we remain in a prime position to continue to source the cheapest rates from across the bank and non-bank lending market.
Additional lifts in the cash rate by the RBA may come as early as its June meeting. Our advice to buyers would be to get in as soon as possible to lock in a fixed rate truck loan prior to further rate rises. We are in a position to move very quickly to source loans to assist buyers looking to settle new purchases immediately.
Contact Jade Truck Loans on 1300 000 003 to discuss new truck loans.
DISCLAIMER: THIS INFORMATION IS ISSUED PURELY FOR THE PURPOSE OF GENERAL INFORMATION PROVISION. IT IS NOT TO BE TAKEN AS THE ONLY SOURCE OF INFORMATION FOR BASING FINANCIAL DECISION-MAKING. THOSE REQUIRING FINANCIAL GUIDANCE AND ADVICE SHOULD CONSULT WITH THEIR FINANCIAL CONSULTANT OR ADVISOR. NO LIABILITY IS ACCEPTED FOR ANY MISREPRESENTATION OF POLICIES, DATA OR ERRORS IN THIS CONTENT.