To Fix or Not to Fix: Navigating the Interest Rate Dilemma as a Business Owner
In today’s financial landscape, you’re likely receiving numerous calls from bankers and so-called “interest rate specialists” urging you to fix your rates. As longer-term fixed rates continue to decline, the decision to lock in a rate or stay variable is more pressing than ever. But before making this crucial choice, there are several factors to consider.
Understanding the Market
The money markets, which typically set the tone for interest rates, have begun lowering their longer-term fixed rates. This trend is also reflected in term deposit rates. We’ve observed similar movements in countries like Canada and New Zealand, where central rates have seen reductions. These shifts suggest that the markets, often a reliable indicator, are anticipating further rate cuts. Banks and financial institutions are beginning to align with this outlook, signalling a potential downward trajectory in interest rates.
However, it’s important to remember that predicting inflation—and, by extension, interest rates—is an imperfect science. Even the Reserve Bank of Australia (RBA), with its vast resources and expert staff, has struggled to get it right in recent years. Their missteps in communication and delayed responses highlight the uncertainty that even the most informed institutions face.
The Interest Rate Debate
With the current movement in the money markets, particularly the pullback in longer-term fixed rates, the noise from interest rate specialists advocating for fixed rates is growing louder. As a business owner, how should you respond?
The Pros of Fixing Rates
- Risk Management: Every business owner has a different tolerance for risk. Fixing your interest rates can offer peace of mind, allowing you to sleep easier at night knowing that your costs won’t spike unexpectedly.
- Stable Cost Base: By locking in rates, you create a more predictable cost environment, which can lead to better financial planning and decision-making for your business.
- Protection Against Rate Increases: Fixing your rates shields your business from the potential upper-side risks associated with variable rates. If interest rates rise, your costs remain stable, protecting your bottom line.
The Cons of Fixing Rates
- Lack of Flexibility: Fixed rates often come with restrictions. If your business has surplus funds, you may not be able to offset those fixed rates as easily as with variable rates.
- Impact on Succession Planning: If you’re planning for business succession, long-term fixed rates might complicate the process. It’s important to consider how these rates align with your future business plans.
- Expansion Limitations: Fixed rates can also hinder your ability to expand. If your current bank can’t support your growth, the opportunity cost of being locked into a fixed rate may outweigh the benefits.
- Bank Motivations: Lastly, consider whether your bank is encouraging fixed rates to genuinely support your business, or simply to secure you as a long-term client. It’s crucial to evaluate their intentions.
Seeking Alternative Perspectives
It’s wise to seek alternate views before making a decision. Some businesses that locked in rates at exceptionally low levels, such as 2.8%, benefited greatly, but these opportunities are rare and unpredictable. Even the RBA’s projections didn’t foresee such favorable conditions at the time.
In the end, whether to fix your interest rates or not is a decision that requires careful consideration of your business’s unique circumstances. Consult with trusted financial advisors, weigh the pros and cons, and make an informed choice that aligns with your risk tolerance and long-term goals.