Is the only way up for interest rates?

• It would certainly appear that way in terms of all the media coverage and conjecture in early February.
• Fixed mortgage rates have been increasing for six months, partly reflecting growing expectations of a rise in official interest rates.
• That doesn’t mean the RBA will push the button in a hurry. There won’t be a rise in official interest rates in the first half of this year, but there is a chance of one in 2022H2, but not as high as markets are pricing in and some commentators are predicting.
• Business activity was all over the place in January as the peak of the adverse impacts of Omicron for Small and Medium-sized Enterprises (SME’s) peaked and then began to dissipate, with the sad loss of many lives.
• The Omicron variant, which we only heard of in the first week of December last year, smashed all expectations of a lively bounce-back in demand conditions over the holiday season and through to late January/early February.
• The latest CreditorWatch Business Risk Index (BRI), for January 2022 displays some signs of there being a turning point towards more normal credit conditions as we proceed through the year.
• Even so, the net result of the CreditorWatch Business Risk Index signals that the Australian economy has some way to go before we can talk about a sustainable, strong recovery.

So where are we at?

Well, we are a little bit in ‘no-man’s land’ – over the worst of the adverse impacts of Omicron, but with a tragic loss of life, large political management errors and a long tail to the variant. This all contributes to the greatest fear for SMEs – uncertainty. However, there is still a touch of optimism creeping in as Australia (along with the rest of the world) adjusts to dealing with pandemic to endemic business conditions.

The trading world has changed forever. Some businesses will thrive in this evolving environment, others won’t return or survive, others still will battle through and come out the other side battered but commercially viable. That diversity of experiences will be one tale of 2022, especially for the first half of the year.

We will see a strong economic recovery. Strong Gross Domestic Product (GDP) numbers in the December 2021 quarter provide a strong platform to confront the economic challenges of 2022Q1. The RBA believes the Australian economy will manage to eke out some growth in 2022Q1, while (rightly) admitting it will be nothing like the pace anticipated by businesses, governments, and authorities prior to Omicron.

This dynamic could run into the June 2022 quarter, but regardless, it is a fair bet that 2022H2 will see less volatility and faster economic growth. That will reflect better times for SMEs and greater business investment than in approaching months.

That dynamic brings in the interest rate equation. There were three RBA communications in the first four days of February. The most important one was the address to the National Press Club (NPC) in Sydney by RBA Governor Philip Lowe. The RBA is cautiously optimistic regarding the prospects of a strong economic recovery that, due to Omicron has, in the Governor’s words, been delayed rather than derailed.

One key to the speech was that for the first time the Governor admitted that the Bank may raise the Official Cash Rate (OCR) before the end of 2022. That raised a few eyebrows. The nuances in Dr Lowe’s speech, missed by many, indicate this outcome is not the prima facie case of the RBA, but interest rate conjecture is here to stay. Persistent and growing speculation of the RBA first moving in 2022H2 rather than in 2023 will have significant consequences for demand and credit conditions for SMEs in 2022.

Harley Dale

CreditorWatch Chief Economist