Here’s what lowering the cash rate means to professional services firms in the face of yesterday’s cut in the cash rate by 25 basis points to 2.25 per cent. This was the first change in rates by the Reserve Bank of Australia (RBA) in 18 months.
The RBA cited moderate expectations for global growth in 2015 with China’s growth in line with expectation and the strengthening US economy balanced by weaker euro area and Japanese economies. In that environment commodity prices have continued to decline, reflecting a combination of lower growth in demand and significant increases in supply.
Locally the RBA sees domestic demand growth as quite weak and likely to remain so for some time with the unemployment rate to rise further before reaching its peak in this cycle. The CPI recorded the lowest increase for several years in 2014 and is expected to remain around 2¼ per cent over the year.
While acknowledging the need to contain economic risks that may arise in the housing market from lower interest rates, the RBA believes, given the significant declines in key commodity prices, a lower exchange rate is likely to be needed to achieve balanced growth in the economy.
The leaders of professional service firms will be testing their current experience against the RBA’s expectation of weak demand growth continuing well into 2015. These subdued economic conditions will create a drag on the growth of many clients and, as a result, many firms.
Throughout 2014 many firms had to deal with limited growth in demand for their services and downward pressure on price from clients trying to reduce costs. This left firms focusing on equity and cost management to maintain equity partner profit levels. These conditions look likely to continue for some time to come.
Lowering the cash rate presents opportunities to borrowers
The management of financing costs is an area that is often overlooked but this decision by the RBA is likely to spark a fresh round of competition amongst lenders and presents the opportunity for firms to review current finance arrangements. In addition, fixed interest rates are at all-time lows, so firms should be considering the most effective structuring of debt to keep interest costs down.
A Beaton service to help firms manage debt and working capital
In March, Beaton Capital is holding a seminar series to help firms deal with debt and working capital management issues. In particular, the sessions focus on interest rates, the optimum mix of short and long term debt, interest rate risk management and financier requirements for reporting covenants.
Click here for details and to secure your place at a Debt and Working Capital Masterclass in Brisbane, Sydney or Melbourne.