Credit in an increasing interest rate environment - is it too early to see what has changed?

Compiled by Peter Bignold MICM Business Development Manager Tasmanian Collection Service

What an interesting economic landscape we have been through over the past few years. A once in a century global pandemic that changed the face of the world in different ways and brought with it different economic responses and impacts. As the world adjusted to the post pandemic environment and coupled with a war in the Ukraine, many countries have been coming to grips with inflation caused from supply side constraints and pandemic related stimulus. Australia has not been immune to the inflation with soaring CPI resulting in the Reserve Bank of Australia (RBA) lifting rates in a sharp fashion with more on the way to combat the inflationary pressures. This represents the first time since 2010 where the Australian population has seen any increase in interest rates (certainly the first time the country has seen a steep rise in rates since back in the mid-nineties).

It could be said, its almost a generation since the economic environment has seen rates on the rise in a way it has occurred which ponders the question whether we have seen any changes in the credit environment when the rates started to rise as well as the promise of more to come. In credit, it is difficult to change tact when the economy shifts but its far more considered in how to respond in terms of addressing collection techniques and strategies.

In our home state where we operate, Tasmania has enjoyed a comparatively stable economic landscape during the onset of Covid restrictions in early 2020. Often called the small island, Tasmania used its natural border to strictly restrict entry and departures from the island forcing the population to look within and focus on itself to generate a stable economic platform. It could be argued the stable nature of the Tasmanian economy offers a reasonable comparative data opportunity when compared to other states and territories in Australia when pondering the question of whether interest rates have made an impact.

As well as considering location for assessing the impact of an increasing interest rate market in the

Cash Rate Target

credit landscape, our analysis has compared like periods from July December 2021 (where the cash rate was set at 0.10%) to the same months in 2022 (where the cash rate had already moved to 1.35% over a very short period of time) with the Central Bank indicating more rates on the horizon. At the time of this article has reached 3.35% and several more rate rises are expected (some anticipating the height may be over 4.00%). This analysis will look at some key changes in credit collection as we see it over these two comparable periods, including debt lodgement, collection numbers, legal actions, and credit enquiries which may glean some insights into whether the rate changes have made any noticeable impacts.

RBA Cash Rate Tracking

The above graph is a reminder of where we have been and where we are now in the rate settings, more particularly since 2010 where the last rate increments occurred and the long period of rate reductions until March 2022 when the worm turned.

What Did We Find?

Looking at the trends between the two periods between 2021 and 2022, it’s reasonable to suggest the data is mixed if looking for a concrete conclusion that rates have changed behaviours.

In the Tasmanian environment, there has been a 4.6% increase in the number of debts lodged but a small reduction in the dollar value of those lodged. A further look into the composition of lodgements over that period didn’t show much of a change in the types of debts being lodged (or via industry) noting the only real variability was timing (as each business or government entity came to grips with staffing challenges in administrative activity).

Interestingly, actual debts collected over the period were 10.7% higher which indicated debtors certainly have the means to meet their obligations (all be it, late) which is consistent with Tasmanian unemployment rates being sub-4.0% (the most recent December 2022 figures showing 3.8%).

We observed an increase in legal action by clients of 8.5% though it is anticipated the jump is not driven by the economic environment but rather a reversal of policy from larger clients who steered away from this during pandemic times.

Noting the mixed data as well as possible variables which can be explained, it is apparent that the effects of the interest rate changes will take some time to flow through the economy and into the credit landscape. The magnitude of the rate increases and the steep nature of these increases has received significant news coverage with pockets of the population to be expected to be hit harder than others. There is likely to be an economic tipping point in various parts of Australia where stress will find its way towards debtors taking longer to meet their obligations though this will take time to flow through.

In the credit environment, there is little to suggest any tightening of credit terms whilst the economy remains in a period of robust growth and economic indicators, but all eyes remain firmly on the RBA. Monetary policy is rarely seen to time their changes to an exact science and can be prone to reversing track (particularly given the steep nature of the recent decisions).

Credit management will need to remain flexible to adapt to any environment that presents itself. A future is hard to predict, so the response to any shifts remains at the utmost importance.

This article has been compiled by Peter Bignold MICM, Business Development Manager – Tasmanian Collection Service – www.tascol.com.au using internal data analysis and RBA data.