Rates on the rise: planning for a higher-for-longer environment

As inflation persists and further increases are expected, businesses are reassessing finance structures, cashflow and risk, with independent advice becoming critical before locking in decisions.

On the second Tuesday of March, the Reserve Bank of Australia (RBA) lifted the cash rate by 0.25% to 4.10%. This marks the second consecutive increase, effectively clawing back almost all the reductions we saw last year.

While Australia did not raise rates as aggressively as some of our global peers in recent years, it is now one of the first developed economies to begin lifting rates again. This shows inflation in Australia has remained higher for longer than expected.

Inflation was already a key concern, and the current geopolitical conflict is now adding further pressure, particularly through rising oil and fuel prices. While no one knows how long the conflict will continue, the impact on fuel costs is already evident.

Fuel is a fundamental input across the entire economy. As prices rise, this flows through to the cost of goods and services more broadly, with increased input costs ultimately being passed on to consumers.

So, while inflation was already a challenge before the conflict, markets are now expecting further rate rises and a longer period of higher interest rates as a result of these added pressures.

Despite the RBA raising the cash rate to 4.10%, money markets are pricing in a rate of 4.50%. While forecasts for the cash rate range between 4.25% and 4.50%, some suggest it could move higher if global pressures persist. The reality is no one knows exactly where rates will peak, particularly given the ongoing geopolitical uncertainty.

What is more certain is that interest rates are likely to remain higher for longer, as inflation is still sitting above the RBA’s target range of 2–3%, and while it has eased, it remains elevated. Ongoing supply chain pressures and higher input costs may continue to keep inflation above target for some time.

For our clients, it’s important to consider not just the interest rate, but the structure and flexibility of your finance. As lending conditions tighten, it can become more difficult to refinance, change lenders or make structural changes to your finance, particularly in situations such as succession planning or asset sales. 

A key question we’re encouraging clients to consider is:

Where do you believe interest rates will peak, and how does your position hold up at that level?

How can you position your business?

If inputs continue to increase, it’s expected that there will be higher costs incurred by your business. To combat this, you may need to seek greater working capital, and short-term funding for your business. 

While most businesses complete a cashflow forecast, many are not reviewing it frequently enough to keep up with current conditions. What’s required now is a rolling, monthly forecast, that gives you a clear and current view of your cash position. A rolling forecast, means you are constantly resetting your outlook based on the latest information, giving you clear visibility on your cash position.

If you typically complete your annual budget in January, it should now be re-forecasted to reflect rising interest rates, higher input costs, and potential further increases.

From a planning perspective, every business should be:

1. Re-costing operations based on today’s prices
2. Running multiple scenarios, including higher cost environments
3. Building greater resilience into forecasts and decision-making

This should not be done in isolation. If you have a team, ensure those responsible for key cost areas are involved and accountable. In family businesses, it’s equally important that all stakeholders, particularly where succession planning or family payments are involved, understand the impact on cashflow and future capacity.

If your forecasting highlights a need for additional working capital, now is the time to discuss this with your debt adviser.

Communication is critical. If you anticipate pressure points, such as tighter cashflow in coming months, it’s far better to have that conversation now rather than waiting until it becomes urgent.

In a stable environment, fixing your interest rate often favours the bank. Typically, there is around a 0.75% difference between variable and fixed rates, meaning you are effectively betting that rates will rise beyond that margin.

Historically, there have only been a small number of windows where fixing made clear sense, notably leading into the GFC and again during COVID when rates were at record lows.

Based on current settings, choosing to fix today assumes that interest rates will rise materially from here. This brings us back to the key question:

Where do you believe interest rates will peak, and how does your position hold up at that level?

While there is uncertainty around interest rates, one consistent theme through previous cycles has been the resilience of the agricultural sector. During periods such as the GFC and COVID, farmland values held firm. Currently, livestock and wool prices remain strong, and if geopolitical pressures continue, we may also see support in grain markets such as wheat and barley.

Three Key Recommendations

1. Don’t panic

Large global shocks often feel worse than they play out. Stay measured and focus on what you can control.

2. Re-forecast your position

Introduce a rolling forecast into your business. Understand your cash position, test different scenarios, and plan for higher costs.

3. Communicate early and often

Strong communication is critical, within your business, with your family, and with your funder. If additional funding may be required, have that conversation early and put the right limits in place before you need them.

The current environment is uncertain, with inflation, interest rates and global events all influencing the outlook. However, the fundamentals remain the same.

Businesses that stay disciplined, maintain visibility over their cashflow, and communicate early will be best positioned to navigate the period ahead.

At SproutAg, our role is to help clients cut through the noise, make informed decisions, and position their business with confidence, not just for the next 12 months, but for the long term.