Higher for longer: Planning your next 12 months when rates and fuel both move against you

On 29 September the Reserve Bank lifted the cash rate by another 25 basis points, to 4.60%. It's the fourth rise this year, and it takes rates to their highest level since late 2011.

Most of the coverage, understandably, has been about mortgages. But for the businesses we work with, it's less about "what does this do to my home loan?" and more like "Which of our plans were built on last year's cost of money, and last year's cost of moving things around, and do they still work?"

Two pressures arriving at the same time

What makes this moment a bit different is that rates aren't moving on their own. In its statement, the RBA pointed to global energy prices that are now much higher than it had assumed only a couple of months ago, and noted that businesses are feeling cost pressures and are either lifting prices or planning to.

You can see that at the bowser (that's the petrol pump, for non-Aussies). The ACCC's latest fuel monitoring puts the average diesel price across the five major cities at close to $2.87 a litre, around $1.10 higher than it was in February. In some regional areas it's been sitting at nearly $3. That's a massive increase.

And the ABS's most recent survey of business conditions gives a sense of how people are responding. Around 44% of businesses said they'd absorbed cost increases rather than passing them on, and close to three in ten small and medium businesses expected to find it hard to meet their financial commitments over the following month.

So it's a squeeze from two directions. Borrowing costs more, and so does almost everything that involves a truck.

So what do we do?

It's tempting, when a rate decision lands, to spend the week guessing what the RBA does next. Some of the banks think there's another rise coming in November, others see that as a risk rather than the base case. To be fair, it's anyone's guess, and trying to plan around a single prediction isn't going to get you anywhere.

What might work better is to go back through the decisions already on the table (the new site, the equipment purchase, the hiring plan, the pricing review) and ask which of them assumed conditions that have now changed. Some will still stack up well and some might need a second look. It's not time to panic, just time to do a bit of spring cleaning.

Planning in scenarios, not reactions

Rather than re-forecasting every time the RBA meets, it's worth setting out a few scenarios in advance.

Something like:

• rates hold where they are for the next year

• one more rise, taking the cash rate to around 4.85%

• rates stay higher for longer, with fuel costs staying elevated too

  
  

For each one, it helps to agree ahead of time what would change. At what point would you slow a hire, delay a capex decision, or revisit pricing? Deciding those trigger points now is a lot easier than working them out under pressure in six months' time.

Separating the rate effect from the fuel effect

It's easy to lump "costs are going up" into one bucket but, in reality, rates and fuel hit the business in different places.

Higher rates will be visible in interest expense, in the cost of funding stock or equipment, and in how comfortable your lender is feeling. They also reduce how much you can borrow. Lenders test serviceability at higher rates, so the same earnings now support a smaller facility, which can take away some of the headroom you might have been counting on when it comes time to refinance. Higher fuel shows up in freight, in cost of goods, in delivery and travel, and often in your suppliers' prices a month or two later.

They also need different responses. The rate side is more about debt structure, refinancing and timing. The fuel side is more about pricing, supplier terms and how you move things around. Pulling them apart in the numbers gives you a much better idea of where the pressure is really coming from.

Pricing is a decision, not a reflex

Lots of businesses are choosing to absorb costs at the moment, and there are often good reasons for that. Customers are stretched too, with fuel and mortgage rates hitting them as well.

But absorbing costs is still a decision, and it's worth knowing what it actually costs you. If margins drop by a couple of points and stay there for a year, what does that do to cash, to the ability to invest, to the buffer you'd want if things got tougher? Sometimes the answer is "we can live with that". Sometimes it's a prompt to look at targeted price changes, surcharges on freight-heavy lines, or conversations with suppliers.

Things that can get missed

A few key items are worth checking while it's front of mind:

Covenant headroom

If your facility has covenants linked to interest cover or earnings, it's worth knowing how much room you've got now, not when the lender asks.

Facility renewal dates

 If a loan or overdraft is due for renewal in the next year, starting that conversation early usually goes better than leaving it late.

Debtor days

When customers feel the pinch, payment times often drift. Keeping an eye on who's paying later than they used to is one of the simplest early warning signs there is.

Working capital

Stock that sits on the shelf for longer costs more to hold when money is more expensive. It's worth looking again at how much cash is tied up where.

It's not a reason to stand still

It's also worth saying that none of this means freezing every decision. Some long-term investments absolutely still make sense in a higher-rate environment. Ranking projects by payback and risk, rather than putting everything on hold, tends to lead to better outcomes than either charging ahead or stopping altogether.

Where to start

If you're not sure where to begin, a simple first step in your cash flow planning is to list the three or four biggest financial decisions you're planning to make over the next twelve months and, for each one, ask what it looks like if rates go up once more and fuel stays where it is. That one exercise usually tells you a lot.

Frequently Asked Questions

How do interest rate rises affect a business?

A rate rise increases interest costs on loans and overdrafts, makes it more expensive to fund stock and equipment, and can reduce how much a business is able to borrow because lenders test repayments at higher rates. It can also slow customer spending and stretch payment times, which puts extra pressure on cash flow.

How should a business plan for further interest rate rises?

Rather than reacting to each decision, set out a few scenarios in advance, such as rates holding, one more rise, or rates staying higher for longer. For each one, agree ahead of time what would change, such as slowing a hire, delaying a capital purchase or reviewing pricing.

Should a business pass rising fuel and freight costs on to customers?

It depends on the business, but absorbing costs is still a decision with a real impact on margin and cash. It's worth modelling what a lower margin does over 6 to 12 months, then deciding whether targeted price changes, freight surcharges or supplier conversations make sense.

What is covenant headroom and why does it matter when rates rise?

Covenants are conditions in a loan agreement, often linked to interest cover or earnings. When rates rise, interest costs go up and the gap between your results and those limits can narrow. Knowing your headroom early gives you time to act before your lender raises it.

Does a rate rise mean a business should delay investment?

Not necessarily. Some long-term investments still make sense in a higher-rate environment. Ranking projects by payback and risk usually leads to better outcomes than either pressing ahead with everything or putting everything on hold.

And if you'd like someone to work through it with you, we're always happy to chat!

Photo credit: Photo by You Le from Unsplash