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RBA governor Philip Lowe said the decision to hike interest rates for a ninth consecutive time was due to global inflation remaining high and below-average growth expected for 2022 and 2023.
Lowe acknowledged the pressures consecutive rate hikes are having on individuals and businesses but said the RBA will do “what is necessary” to battle inflation.
“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said.
While the impact of multiple rate hikes is firmly focused on borrowers, financial experts are concerned businesses may too fall off the precipice of a fixed-rate cliff.
Jirsch Sutherland Principal Michael Chan warned the amalgamation of cash rate hikes, cost of living pressures and surging inflation is leading to a possible corporate insolvency risk.
“The perfect storm is brewing. When rising interest rates are coupled with inflationary pressures, past trends have shown a corresponding rise in bankruptcies,” Chan said.
Chan said history may be repeating itself after the 1990 to 1991 recession led to a sharp economic downturn and a hike in businesses collapsing and many losing their jobs – when the interest rate hit a record-breaking 17.5 per cent.
In the Global Financial Crisis, where Australia narrowly avoided a recession, bankruptcies rose and the cash rate hit a hit of 9.36 per cent.
Chan warned the economic landscape is heading in a similar trajectory in 2023.
”While bankruptcy numbers are currently still stable and homeowners still have some savings, cracks are appearing,” he said.
”We are already seeing a definite increase in corporate insolvencies and believe personal insolvencies will follow,” he said.
It comes after there has been a slate of businesses collapsing particularly construction companies as corporations battle staff shortages, inflation and now interest rate rises.
Chan urged individuals and businesses to check their finances as the economy turns downwards.
“Financial distress can sometimes take you by surprise,” he said.
“The cost of living is increasing so quickly that even if you’re currently employed, you might not be able to service your debts.
“Having a job doesn’t mean you’re not at risk of bankruptcy.
“With the value of homes falling so rapidly, it might put homeowners into a negative equity position, not to mention people falling off the ‘fixed-rate cliff’ when they revert to sharply higher variable rates.”
Chan urged consumers and businesses to check in with their accountants before financial pressures increase further.
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