Context: Policy credibility over market comfort

Australia’s inflation pulse has eased from its peak, yet the Reserve Bank of Australia (RBA) has made clear it will not be hurried into rate cuts. Deputy Governor Andrew Hauser recently characterised the probability of near-term easing as very low and underscored the imperative to avoid a renewed inflation flare-up: “It’s our job to ensure that doesn’t happen again,” according to recent coverage. The signal is unambiguous: policy stays tight until the RBA is confident inflation is durably contained.

Globally, central banks are diverging. The European Central Bank cut policy rates in June 2024, but RBA officials have flagged Australia’s different mix of domestic drivers and risks. This echoes long-standing RBA thinking on the inflation–employment trade-off (as explored in prior RBA speeches on the economic outlook): structural dynamics matter more than headline prints. Bank economists have consequently pushed back expectations for cuts, with one major house guiding that no move is likely before February, reinforcing a higher-for-longer base case.

For Australian corporates, the business impact is immediate: elevated discount rates, persistent debt servicing costs, and fragile consumer demand in a cost-of-living environment. The winners will treat this as a strategic regime shift, not a temporary squall.

Decision: Reframe the playbook using a three-part policy-risk lens

Leading CFOs are applying a policy-risk lens to capital allocation using three business intelligence levers:

• Base case reset: Assume policy rates remain elevated for 12–18 months; unlock spend only where projects clear higher risk-adjusted hurdle rates. Recompute WACC with a higher risk-free rate and tighter credit spreads.
• Trigger map: Define cut triggers (e.g., sequential declines in core services inflation, softening wage pressure). Pre-authorise staged investments that automatically release when triggers are met.
• Balance sheet barbell: Pair medium-tenor fixed-rate hedges with short-term flexibility. Build surplus liquidity to absorb cash-flow volatility while preserving a call option on expansion or M&A.

This decision architecture shifts leadership focus from “when will rates fall?” to “what earns a return if they do not?”

Implementation: Treasury mechanics, working capital, and data discipline

Technical execution is where advantage compounds:

• Hedge strategy: Use swaps to lift fixed coverage to a target band (often 50–70% for mid-caps) and options (caps) to retain upside if cuts eventually arrive. Ladder maturities to avoid cliff risk.
• WACC and hurdle recalibration: If the risk-free rate remains 50–100 bps above pre-2022 norms, revise hurdle rates accordingly. Reassess the investment backlog; sequence projects by marginal ROIC spread over the new hurdle.
• Working capital digitisation: Improve cash conversion cycle via invoice automation, dynamic discounting, and supplier term optimisation. In consumer-facing sectors, tighten inventory turns while protecting on-shelf availability.
• Pricing and contract reset: Introduce indexation clauses or review cadence for price adjustments, especially in B2B contracts, to preserve margin under sticky cost inputs.
• Forecasting governance: Deploy advanced forecasting—potentially AI-enabled cash and demand models—under robust oversight. Australia’s AI Ethics Principles provide a pragmatic framework around transparency, fairness, and accountability; public sector exemplars (e.g., governance approaches referenced by the ATO) demonstrate how model risk can be managed without stalling innovation.

Results: What the numbers look like on a typical mid-cap balance sheet

Composite analysis (representative of an ASX mid-cap with $200m gross debt, 75% floating, and $50m EBITDA) illustrates the economics of higher-for-longer and the value of proactive moves:

• Interest expense sensitivity: Every 25 bps move on $150m floating exposure equals ~$0.375m annualised expense. A 50 bps upside surprise adds ~$0.75m; a 100 bps surprise adds ~$1.5m. If base policy rates persist at current levels for 12 months, unhedged firms carry that cost throughout the period.
• Hedging impact: Raising fixed coverage from 25% to 60% via swaps halves the floating exposure from $150m to $80m. The same 50 bps shock then adds ~$0.40m rather than ~$0.75m to annual interest—an immediate hedge benefit of ~$0.35m. Over two years, cumulative savings approach ~$0.7m before fees.
• Interest coverage: With baseline interest expense at $8.0m, EBITDA/interest coverage is 6.25x. A 100 bps increase on $150m floating adds ~$1.5m, reducing coverage to ~5.3x. Hedging 60% lifts coverage back toward ~5.8x, preserving covenant headroom.
• Working capital lift: Reducing DSO by 5 days on $500m annual revenue (assuming 30% credit sales and even seasonality) releases roughly $2.05m in cash. If short-term funding costs sit near 7–8%, that implies ~$140–$160k in annual interest saved—recurring, low-risk value.
• Repricing discipline: Instituting semi-annual indexation on B2B contracts equivalent to 50% of input cost inflation can preserve 50–100 bps of gross margin in services-heavy sectors—often the difference between meeting and missing guidance.

At portfolio level, recalibrating WACC upward by 50 bps can reshuffle the capex queue. Projects once clearing a 9% hurdle but now facing 9.5% may be deferred; equally, automation and working capital programmes with 25–40% IRR move to the front of the line.

Market trends and competitive dynamics

While some global peers are already in rate-cut mode, Australia’s policy path is deliberately conservative. That divergence creates strategic whitespace: disciplined acquirers with stable funding can capitalise on valuation gaps as highly levered competitors retrench. In parallel, cost-of-living pressures continue to shape demand patterns—pressing retail, housing-adjacent and discretionary sectors while supporting value propositions and subscription models with clear ROI.

Industry experts broadly argue that policy credibility now outranks speed. Hauser’s caution aligns with this: it dampens the risk of a second inflation wave and the harsher medicine that would follow. For business, sustainability of policy beats immediacy of relief.

Lessons: What leaders should do now

• Bank the base case: Plan on no near-term cuts. If the upside arrives, you gain optionality; if not, you preserve resilience.
• Operationalise triggers: Tie pre-approved investments to measurable indicators (core inflation trajectory, wage growth moderation) to avoid decision whiplash.
• Lock predictable economics: Use swaps/caps to right-size risk. Don’t over-hedge; ladder tenors to keep future flexibility.
• Sweat working capital: It’s the cheapest funding in a high-rate world. Five days’ DSO is meaningful cash.
• Govern advanced analytics: Adopt forecasting tools under clear oversight. Borrow from Australia’s AI Ethics Principles to de-risk model use in finance and operations.
• Be opportunity-ready: Maintain dry powder for distressed or strategic assets as competitors adjust to tighter cash flows.

Bottom line: The RBA’s stance is a policy choice in favour of credibility. Treat it as a strategic constant, not a waitlist for cuts. The firms that win will make money at today’s rate, not tomorrow’s hope.