The Sydney Morning Herald is reporting that according to the market and leading economists, there is a 92% chance of a further interest rate cut in May 2015. This would see rates drop to 2%.

The speculation of further rate cuts is driven by the ongoing weakness in the economy and in particular, the resources sector. Also weak is business and consumer confidence that manifests itself in reduced spending throughout the economy.

While there is little doubt a further rate reduction would add heat to the already hot house prices in Sydney and Melbourne, the question remains, will another rate cut stimulate the economy?

Have interest rate reductions had a positive effect on the number of voluntary liquidation or forced liquidation appointments?

Voluntary Liquidations – Movement since GFC

 

Quarter	2008 -09	2009-10	2010-2011	2011-12	2012-13	2013-14	2014-15
September	898	931	1,064	1,271	1,385	1,157	1,128
December	902	983	1,009	1,087	1,179	1,175	1,009
March	886	916	1,036	1,099	1,058	935
June	996	1,109	1,228	1,284	1,373	1,161
Total	3,682	3,939	4,337	4,741	4,995	4,428	2,137
		+7%	+10%	+9%	+5%	-11.5%	-8.5%

 Court Liquidations – Movement since GFC

 

Quarter	2008 -09	2009-10	2010-2011	2011-12	2012-13	2013-14	2014-15
September	792	654	721	910	647	1,102	696
December	797	569	685	811	787	797	521
March	680	551	553	871	820	598
June	646	672	679	588	711	564
Total	2,915	2,446	2,638	3,180	2,965	3,061	1,217
		-16%	+8%	+20.5%	-7%	+3%	-36%

 Interest Rates Movements since GFC

The table below details the interest rate movements between September 2008 and February 2015.

 

Date	Change	Rate
Feb 2015	-0.25	2.25
Aug 2013	-0.25	2.50
May 2013	-0.25	2.75
Dec 2012	-0.25	3.00
Oct 2012	-0.25	3.25
Jun 2012	-0.25	3.50
May 2012	-0.50	3.75
Dec 2011	-0.25	4.25
Nov 2011	-0.25	4.50
Nov 2010	+0.25	4.75
May 2010	+0.25	4.50
Apr 2010	+0.25	4.25
Mar 2010	+0.25	4.00
Dec 2009	+0.25	3.75
Nov 209	+0.25	3.50
Oct 2009	+0.25	3.25
Apr 2009	-0.25	3.00
Feb 2009	-1.00	3.25
Dec 2008	-1.00	4.25
Nov 2008	-0.75	5.25
Oct 2008	-1.00	6.00
Sept 2008	-0.25	7.00

 

Analysis 

1. At the start of the GFC, interest rates were 7%
2. From September 2008 to April 2009, interest rates were slashed from 7% to 3% in an attempt to stimulate the economy
3. In 2008 – 2009, consumer and business confidence had plummeted.
4. During this period, Voluntary liquidation numbers increased despite the reduction in interest rates.
5. From September 2008 to June 2010, Court liquidations reduced. The likely reason was government intervention. At the time, the government/ATO assisted companies and employment by accepting installment arrangements, rather than pursuing recovery through court liquidation.
6. From April 2009 to November 2010, interest rates increased from 3% to 4.75%.
7. Voluntary Liquidation numbers continued to surge.
8. Court liquidation began to increase during 2010 – 2012
9. Interest rates peaked at 4.75% in November 2010 and then began a steady decline from November 2011 to 2.25% in February 2015
10. Liquidation appointments continued to rise until 2013 (despite rate reductions) when the trend was finally reversed.
11. This year has seen a reduction in voluntary liquidation and a dramatic fall in the number of Court liquidations.

Conclusion

There appears to be a correlation between interest rates and the number of court and voluntary liquidation appointments, albeit there seems to be a lag of between 1 – 2 years.

While interest rates appear to have a positive impact on the number of liquidation appointments, the same might not be said of both the Australian Business & Consumer confidence indexes. Both appear headed toward negative territory despite record low interest rates.

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Source: smh.com.au, ASIC statistics

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Disclaimer
This article is not to be construed as legal advice but is presented for information and research purposes only. No guarantee implied or expressed is given in respect of the information provided and accordingly no responsibility is taken by The Insolvency Experts or any member of the company for any loss resulting from any error or omission contained within this article.