Equipment Leasing Report Foresees Rising Inflation and Interest Rates

The Equipment Leasing and Finance Foundation issued a report called “How Inflationary Pressures and Rising Interest Rates Could Impact the Equipment Finance Industry.”

Given its name, the report is fairly self-explanatory. Its premise is that within the next one to three years there is likely to be a rise in inflation and interest rates which may affect the equipment finance industry, including customer demand, portfolio performance, spreads, and the propensity to finance.

The report conveys three potential scenarios regarding inflation and interest rates. Scenario #1 is “Status Quo,” or a continuation of low interest rates and inflation levels. This would place the economy in quadrant 1 of the accompanying chart.

Scenario #2 is “Breakout Inflation Prompts Strong Fed Response.” According to the report, in this scenario, inflation rises quickly, moving in quadrant 2. Then, in order to slow inflation, the Fed raises interest rates and the economy moves into quadrant 3.

What would this Scenario #2 look like for the equipment leasing industry? Among other outcomes, the report said that “equipment end-users are better able to make payments when their revenues are being driven up by higher prices, but their equipment payments are fixed.” This is a good thing for the industry, but may be a double-edged sword because, with more cash on hand, customers may be more likely to buy equipment, rather than lease it.

Scenario #3 is “Aggressive Fed Action While Inflation Lags.” This would put the economy in quadrant 4 with rising interest rates, but slow inflation. According to the report, this could create an environment where “real interest rates are rising in the absence of persistently strong economic growth, [and] business confidence is likely to fall.” This would translate to a falling demand for investment and a decline for the industry.

Established in 1989, the Equipment Leasing & Finance Foundation is a non-profit dedicated to inspiring innovation and contributing to the improvement of the equipment leasing and finance industries.

Todd Stone was a reporter for deBanked.