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RBA move a ‘kick in the guts’, but few surprised

Business

With Christmas approaching, small business and mortgage holders can look forward to “the type of pain that high interest rates have caused in the past”.

By Philip King 12 minute read

The RBA’s move to raise rates by 25 basis points to 4.35 per cent was described as a “kick in the guts” for small business with Christmas approaching but few observers were surprised by the decision.

CPA Australia senior manager Gavan Ord admitted the increase was expected after September’s CPI figure of 5.4 per cent showed inflation remained a “major challenge in some sectors”. But he said it would be challenging for mortgage holders and small business when they needed it least.

“After some relief in recent months, the RBA’s decision will be extremely frustrating for many households and businesses already facing high cost of living pressures,” he said.

“It’s a body-blow for mortgage holders. Those who have adapted to this new interest rate environment would have hoped we were through the worst of it. Households just coming off long-term fixed rates now face a daunting change to their budgets.”

“This is a critical juncture for the economy. The RBA and the government must ensure they continue pushing in the same direction. It is critical that they work in tandem to dampen inflation in all sectors.”

“High interest rates, rising wages and higher costs are going to keep putting pressure on small businesses. Businesses will need to pass their costs onto customers and may need to reconsider their plans. They should certainly be factoring in further rate increases into their business plans.”

BDO economics partner Anders Magnusson said inflation was failing to fall quickly enough to satisfy the RBA’s target and there was “little room for unexpected inflationary events without putting the return to target at risk”.

“Today’s decision to raise the cash rate shows that the RBA is not comfortable with the current outlook,” he said. “While many households feel squeezed, they are not yet feeling the type of pain that high interest rates have caused in the past. The RBA is now taking them into that territory.”

He welcomed the Labour government’s decision to delay some infrastructure spending to cool the economy.

“Fiscal policy like this is politically difficult but effective at taming inflation. The large scale of planned spending would have had a material impact on prices in the trade and construction sectors, increasing inflation.”

CreditorWatch chief economist Anneke Thompson said the decision would do little to depress the prices of commodities increasing fastest.

“Unfortunately, the grim reality is the goods or services that are still recording high levels of inflation are not under any demand pressure, therefore this cash rate rise will have little impact on the prices of rents, fuel, insurance and utilities,” she said.

“Instead, this rise will be most burdensome for those businesses already at the coal face of the fight against inflation, such as the food and beverage, retail trade and construction sectors.

“Demand in these sectors has already contracted and higher interest rates will force consumers and potential home builders/renovators to further rethink their future spending decisions.”

She said discretionary retailers would already have stock in place for Christmas and many would be left concerned about sales and stock levels over what was usually their busiest period.

“The food and beverage sector already tops the list of industries ranked by failure rate,” she said. “Until quite recently, pricing for stock, gas and electricity and labour supply have been the key challenges facing the industry. The industry is now starting to grapple with slowing demand as savings rates dwindle, with this latest increase to the cash rate likely to slow demand in the sector further.”

Employment Hero said the RBA decision would hit seasonal hiring compared to last year as consumer confidence plumbed fresh lows.

CEO Ben Thompson said the RBA had the power to make or break Christmas for small business and the decision was a “kick in the guts”.

“With already thin or shrinking profit margins, Australian SMEs face even greater financial burdens coming into the end of the year,” he said. “A move from the RBA to seemingly aid economic stability could realistically result in significant instability for our small business community and its workers.”

In yesterday’s statement, the RBA said it studied updated data on inflation, the labour market, economic activity and a revised set of forecasts since its August meeting.

“The weight of this information suggests that the risk of inflation remaining higher for longer has increased,” it said. “While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.”

It acknowledged that inflation had passed its peak but said it was still too high and “proving more persistent than expected a few months ago”.

“The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected.”

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Philip King

Philip King

AUTHOR

Philip King is editor of Accountants Daily and SMSF Adviser, the leading sources of news, insight, and educational content for professionals in the accounting and SMSF sectors.

Philip joined the titles in March 2022 and brings extensive experience from a variety of roles at The Australian national broadsheet daily, most recently as motoring editor. His background also takes in spells on diverse consumer and trade magazines.

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