How is this so? What we want you to look at today is the impact of increasing interest rates in Australia within the global exchange rate market.
Our interest rates have been going up in recent time, but on the other side of the equation our currency the Aussie Dollar has been getting stronger against the green back (US dollar).
AUD / USD Exchange Rate
Jan 2005 A$1 bought about US$ 0.78
Jan 2008 A$1 buys about US$0.878
Australian Interest Rates / Equipment Finance Rates
RBA Cash Rate Jan 2005 5.25% / EF lending rate 8.00%
RBA Cash Rate Jan 2008 6.75% / EF lending rate 9.50%
So how do these factors impact me?
If you bought a new machine 3 years ago in January 2005 and it cost US$50,000 this converted to approx $64,000. If you financed this over 60 months with a Nil Balloon your fixed monthly payments would have been approx. $1,292.00 per month
If you finance a new item of equipment that costs the same US$50,000 today then the amount financed would be only $56,950. At the higher interest rate of 9.5% today your monthly payments will be only $1,186 a saving of $106 per month or $6,360 over the life of the fixed rate contract.
If the decision to buy was good in 2005 then you tell me would you make the decision to purchase today if the monthly commitment was less?
For the purpose of this exercise we have to assume that the 2005 price included all taxes and duties payable at that time and today’s price includes GST etc.
Now I am no economist so I am not going to make any predictions about future interest rates and exchange rates, but if this new government can keep interest rate increases in hand (lets say equipment finance rates move up another 1% to 10.5%) and the US dollar strengthens against the AUD to USD 0.825 then your monthly payments will be almost the same as the 2005 equation above (just a few cents per month more).
On the other hand if the US dollar continues to weaken and we get to parity (AUD 1 = USD 1) then interest rates can go up to 19.5% before your monthly payment would be more than in 2005. If we get to this level of interest rate I think many of us would already be out of business.
When you are purchasing new equipment, then the interest rate has less impact on your monthly payment than the exchange rate. This is so if your machine is made overseas and sold in US dollars. The impact for local manufactures is different if they manufacture locally with locally sourced and manufactured components, then they have had to get smart to stay competitive. Local manufacturers that used foreign components will have had benefits from the strength of the Australian dollar but not to the same extent as finished goods importers.
Written by Peter Cochran - 31st January 2008