Q&A, your way: Episode 4
Morningstar’s director equity research Johannes Faul answers a question about the impact of rising rates on debt.
Johannes Faul: Great, thanks. Fed rate, help me understand. Okay. This is our question we've got today. Can someone help me understand something? If the Fed is increasing rates, how does this make existing debt harder to service? If I owe a debt at a fixed rate, then does it matter if the Fed raises rates or not?
Well, that's a great question. And the important thing here also is to differentiate between a variable rate and a fixed rate. With a fixed rate as long as that debt is still running, then nothing changes. But I'm coming from a consumer perspective here because I'm the retail analyst at Morningstar. And what it really means for all of our consumption and consumer demand is fixed debts have different maturities, and as those fix debts roll, people need a refinance at that higher rate. So, at the end, it does matter that the Reserve Bank, in this case in Australia, is raising its rates, because once people want to borrow or extend their borrowings, they will be paying a higher rate. And what that means for consumer spending and why I'm concerned about and we at Morningstar from consumer lens is that when people spend more on borrowing, as borrowing costs go up, there's generally less money there to spend, and that will impact retailers, especially discretionary retailers, like retailers of consumer electronics like JB Hi-Fi or clothing like Premier Investments.
So, just to wrap it – fixed rates shouldn't be impacted while that debt doesn't mature, but anything that's variable or as that debt rolls will be impacted by rate decisions made by the RBA today.