I don’t know either. Nobody does. But we can look to the money markets, to understand their current thinking.
The Australian interest rate market has experienced significant changes in recent years, from almost zero in the money market to just under 4.50% in 2 years. On top of this rate, banks then add their risk margin to derive your interest rate. This has profound implications for farmers, particularly those that may have leveraged the business too far and then seen their annual interest costs double. To understand these impacts, let's delve into the below charts and their interpretations.
Historical 90-Day BBSW
The 90-day Bank Bill Swap Rate (BBSW) has seen substantial fluctuations over the past few years. After maintaining low levels through 2019 and 2020, it started climbing in 2021, peaking in 2022. This rise reflects the broader economic conditions and monetary policy responses, including efforts to curb inflation.
Commercial Loans
Market Rate Loans linked to benchmarks like the BBSW, would see rising costs immediately. The sharp increase in 2022 indicates that market rate loan holders would have faced higher interest charges. Variable Rate Loans tend to move when lending banks adjust the interest rates, often in response to RBA changes in monetary policy. Borrowers with variable rate loans would have experienced higher monthly repayments as the banks increased rates but would have lagged behind the more immediate movements of daily BBSW.
90-Day Bank Bill Futures Implied Forward Yield
The forward yield curve for 90-day bank bills shows the market's expectations of future interest rates. The yield is projected to decline from its peak in late 2024, suggesting that the market anticipates lower interest rates in the coming years, rather than coming months as was the case prior to recent inflation data.
Borrowers considering fixed rate loans might lock in rates now to avoid potential future increases. However, given the projected decline, some might prefer to wait for lower rates.
Those with market rate or variable rate loans could see relief as future rates decrease, potentially lowering their repayments in the coming years.
Swap Curve Comparison (March vs June)
The swap curves for March and June illustrate shifts in market expectations over a few months. The June curve indicates higher rates for all tenors, particularly in the near term, compared to March.
The swap curve is important because the fixed interest rate on a commercial loan is essentially the sum of the current fixed swap rate in the financial markets and the credit margin applied to your loan, ensuring that the lender covers its funding costs and achieves a risk-adjusted return based on how it views the risks associated with your farm.
Impact on Borrowing Costs
Market Rate Loans: The shift upwards in the swap curve will increase the interest rates on market rate loans. Those with variable rates, might be lucky and not see another rise until the RBA increases its cash rate (if at all). Rising costs for market rate loans, as lenders adjust their expectations for future interest rates.
The cost of fixed rate lending, including equipment finance, will have already increased. Borrowers might need to weigh the benefits of locking in current rates against the possibility of future declines as implied by the forward yield curve.
Summary
The Australian interest rate market's recent changes underscore the importance of strategic financial planning for farmers. The rise in the BBSW and adjustments in swap curves suggest higher costs for both variable and market rate and fixed rate loans. However, the projected decline in forward yields offers a glimmer of relief for the future. For farmers and other borrowers, understanding these dynamics is crucial.
How easily can quantify the impact to your farm business? How do you actually decide whether to have all or some of your loans as variable or fixed rates?
In this evolving landscape, informed decision-making and proactive financial management are key to navigating the complexities of the Australian interest rate market and its impact on the farms’ cost of debt. In the next Kash Blog we will look at how to analyse the financial risks between variable rates and fixed rates without 'punting' on the outcome.
3 JULY 2024
Important Information
In this disclaimer, “we”, “AFS”, means AgFin Services Pty Ltd as Trustee for Barnes Family Trust No.2 (ABN 22 490 274 175)
This report is for information purposes only.
In preparing this document, we have relied upon information which we believe to be reliable and accurate. AFS believes that the opinions expressed herein are accurate, but no warranty of accuracy or reliability is given. AFS does not warrant that its analysis has revealed all of the matters which a more extensive examination might disclose.
Importantly, no decision should be made on the basis of the information without first seeking accounting, legal and/or taxation advice.
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