In a decision that many small business owners across Australia will welcome, the Reserve Bank of Australia (RBA) has opted to keep the cash rate at 4.35 per cent. This move comes amid ongoing worries about inflation and economic uncertainty.

The inflation picture

Even though inflation has dropped significantly since its peak in 2022, it’s still above the RBA’s target range of 2-3 per cent. The latest figures show the Consumer Price Index (CPI) went up by 3.9 per cent over the year to the June quarter. The RBA notes that while this is close to previous predictions, inflation remains stubbornly high, especially in the services sector.

“The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy,” the RBA stated. They project that inflation will return to the target range by late 2025 and hit the midpoint in 2026, a bit later than they previously thought

Impact on small businesses

For small business owners, this rate hold is a mixed blessing. On one side, keeping rates steady helps avoid further pressure on businesses already facing higher costs and reduced demand – but withholding cuts for too long can also prove a problem.

Anneke Thompson, Chief Economist at CreditorWatch, points out that the RBA’s current rate settings are already putting significant pressure on certain sectors.

“Demand has certainly cooled significantly in areas of discretionary retail and the café and restaurant sector,” Thompson says. She mentions that the trimmed mean measure of inflation, which excludes volatile items, actually dropped slightly between March and June, indicating that the RBA’s policies are having an effect.

However, Thompson warns about the risks of keeping high rates for too long. CreditorWatch’s June Business Risk Index (BRI) data shows a 49.9 per cent drop in the average value of invoices held by businesses over the past year, signaling a major slowdown in business activity.

“Holding the cash rate at this peak for too long risks causing further unnecessary pain on many small businesses, particularly in the construction, retail, and hospitality sectors,” she warns.

Experts weigh in on rate hold

Dr. Isaac Gross, a lecturer at Monash Business School, sees the rate hold as a reaction to positive trends in inflation.

“The RBA held interest rates steady today because of the encouraging downward trend in inflation,” he explains.

Gross thinks this moderation might lead to rate cuts sooner than expected, possibly before the end of the year

Stephen Smith, a partner at Deloitte Access Economics, agrees, highlighting the RBA’s delicate balancing act between controlling inflation and promoting economic growth.

“Today’s decision to keep interest rates on hold is the right decision for Australian businesses and households and reduces the risk of a recession we don’t have to have,” says Smith.

He points out that core inflation is already dropping without more rate hikes, reaching its lowest rate in two years. Smith also notes that areas where inflation persists, like rents, insurance, and weather-dependent produce, can’t be controlled by raising rates.

“The Australian economy is not suffering from rampant demand, so the case for a rate hike is weak. While we need to remain vigilant on inflation, the pivot to investing for growth is now the priority,” Smith explains.

What it means for small business owners

For small business owners, the RBA’s decision provides a temporary break from rising borrowing costs. However, the overall economic environment remains tough. It’s crucial for businesses to stay flexible, keep an eye on economic trends, and be ready for possible changes in monetary policy.

As Thompson from CreditorWatch suggests, businesses in sectors hit hardest by the rate increases should continue to focus on efficiency and cost management. Meanwhile, experts like Dr. Gross and Stephen Smith have indicated that the possibility of future rate cuts could offer some relief down the line.

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