RBA lifts cash rate to 4.35%, in “make or break” call for SMEs

Interest rates look set to climb higher, after the Reserve Bank of Australia (RBA) today decided to raise the official cash rate by 25 basis points to 4.35%.

It means the monthly cost of servicing mortgages will increase for many Australians if banks choose to lift interest rates by the same amount, with data from Finder showing a household with a $590,000 mortgage will now be paying approximately $1,345 extra per month than they were in April 2022.

Newly appointed RBA governor Michele Bullock opted to leave the official cash rate unchanged at the October meeting, but had indicated the central bank would “not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”.

On the day that a horse race has traditionally stopped the nation, business owners and consumers were holding their breath to see if Bullock would adjust the official cash rate as the all-important Christmas retail season gets underway.

The RBA had not increased rates since June, but its board said today’s increase is necessary “to be more assured that inflation would return to target in a reasonable timeframe”.

“Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” the board said in the statement released after its meeting today.

“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. CPI inflation is now expected to be around 3.5% by the end of 2024 and at the top of the target range of 2 to 3% by the end of 2025.”

Despite sections of the SME community feeling optimistic heading into 2024, data from Employment Hero suggests continued low consumer confidence will translate into weaker seasonal hiring in the sector over the summer months.

The HR startup’s latest SME Index showed that while SMEs, on average, grew their employee numbers in September, by 0.3% on a month-by-month basis and 6.6% on a year-on-year basis, challenging times are likely to continue through to the end of the year.

The September index, which is based on data from 150,000 SMEs and 1.5 million employees, recorded monthly incremental employee growth in all states and territories, ranging between 0.1% in the Northern Territory and 0.6% in Tasmania. Businesses in the retail, hospitality and tourism sectors experienced the largest monthly increase, of 0.5%.

Today’s RBA decision “had the power to make or break Christmas for Australia’s SMEs”, says Employment Hero co-founder and CEO Ben Thompson.

“Regrettably, with interest rates now set to rise, we are likely to see growth drop off over the summer trading period,” he added.

“We were already expecting seasonality hiring to reduce as businesses seek to recoup losses, so the RBA’s rate rise of 25 basis points will no doubt be a kick in the guts for our small business community.”

Australian SMEs are already operating on “thin or shrinking profit margins”, said Thompson, and now they will face greater financial burdens in the final months of 2023.

“Not to mention that Australian workers already grappling with the rising cost of living now must face the possibility of reduced job opportunities and hours as businesses scramble to adjust their plans and budgets,” 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.”