Small business confidence may lift following CPI fall to 2.1%, with analysts saying rate cut is ‘all but nailed on’ for August meeting.
Small business owners are eyeing potential cash flow relief after inflation tumbled to its lowest level in four years, with analysts now saying an interest rate cut in August is virtually certain.
The Consumer Price Index rose just 2.1 per cent annually in the June quarter, down from 2.4 per cent in March, according to Australian Bureau of Statistics data released today. The result puts headline inflation at the bottom of the Reserve Bank’s 2-3 per cent target range and marks the lowest annual rate since March 2021.
For small and medium enterprises grappling with elevated borrowing costs and compliance expenses, the inflation data offers hope that monetary policy relief may finally be within reach.
Market ocnfidence builds for rate relief
Financial markets have responded decisively to the inflation news, with analysts saying the data removes remaining barriers to monetary easing.
Josh Gilbert, Market Analyst at eToro, said the result provides the confirmation the RBA has been seeking. “Today’s Q2 CPI print is the confirmation the RBA has been waiting for. Headline inflation has dropped to 2.1% year-on-year, right at the bottom of the RBA’s target band, and underlying inflation fell from 2.9% in the first quarter, reinforcing the disinflation narrative that’s been building for months,” Gilbert said.
“With inflation falling faster than forecast, domestic demand soft, and the labour market weakening, it’s becoming harder for the RBA to justify its current stance. After the surprise pause in July, today’s data means an August rate cut is all but nailed on.”
Markets are now pricing a 93 per cent probability of a rate cut at the RBA’s 12 August meeting, up from around 70 per cent before today’s data release.
SME sector awaits reprieve
The potential for lower interest rates comes as welcome news for small business owners who have faced a challenging period of elevated costs and subdued demand.
Ben Thompson, CEO of Employment Hero, said the inflation result offers much-needed stability for the small business sector.
“With annual inflation now at its lowest level since the March 2021 quarter, the case for a rate cut is getting harder to ignore. This is exactly the kind of sustained momentum the RBA has been waiting for, so it’ll be interesting to see whether they now consider the evidence strong enough to justify a move,” Thompson said.
“For consumers and small businesses, this drop in inflation offers a much-needed sense of relief and stability. While wages and compliance costs have just increased, easing inflation gives business owners hope that interest rates will follow, freeing up cash flow and helping them stay resilient in a tough environment.”
Labour market remains fragmented
However, employment data suggests small business hiring remains subdued despite the improving inflation outlook.
Martin Herbst, CEO at JobAdder, highlighted persistent challenges in the labour market that extend beyond interest rate policy.
“Falling inflation puts the RBA in a stronger position to cut rates, but that alone won’t fix the labour market. This week’s ABS figures show that job mobility has dropped to 7.3%, the lowest in over a decade, and underemployment remains at 6%. That’s 1.3 million Australians who want more hours but aren’t getting them,” Herbst said.
“We’re seeing workers stay put, not necessarily because they’re satisfied, but because changing jobs still feels uncertain in the current job market. Recruiters will need to work harder to build trust with candidates and help employers regain confidence to invest in their labour force ahead of the next growth cycle. The opportunities are out there, and it’s a great time to find talent, but we need to meet the market where it is.”
Thompson’s data corroborates these employment concerns, with implications for small business growth prospects.
“Employment Hero data shows both employment and hours worked stayed relatively stagnant in June, so the labour market remains fragile. But if today’s CPI result gives the RBA the confidence to act, we could see a lift in consumer sentiment, more hiring, and a stronger rebound in economic activity,” Thompson said.
The CPI data revealed some relief in housing-related expenses that directly impact small business operations, particularly for those in retail and hospitality sectors dealing with rental costs.
Michelle Marquardt, ABS head of prices statistics, said quarterly housing inflation eased to 1.2 per cent from 1.7 per cent in the previous quarter, while rental costs moderated from 1.2 per cent to 1.0 per cent.
Housing costs have been a significant burden for small businesses, particularly those requiring physical premises, making any moderation in this category particularly relevant for SME planning.
Property esctor anticipates relief
Oliver Hume Chief Economist Matt Bell said the inflation result should provide certainty for businesses and households alike.
“Today’s CPI release is great news for mortgage holders and home buyers eagerly waiting for the next cut in interest rates. Many households were bitterly disappointed with the decision to leave rates on hold on 8th July, with the RBA deciding to wait for today’s inflation release before moving again,” Bell said.
“Markets were pricing in 92% chance of a cut at the next meeting on 12th August. Today’s data pretty much locks that cut in.”
Bell noted that underlying inflation, the RBA’s preferred measure, now sits at 2.7 per cent annually, “safely within the RBA’s 2-3% target band for the second consecutive quarter.”
Of particular relevance to service-based small businesses, services inflation continued its downward trajectory, falling to 3.3 per cent annually from 3.7 per cent in March.
“This is the lowest Services annual inflation in three years and continues to reflect easing inflation for rents and insurance,” Marquardt said.
The moderation in services inflation suggests that cost pressures facing many small businesses in sectors such as professional services, hospitality, and retail may be beginning to ease.
Cautious optimism for policy path
While analysts expect rate relief to begin in August, they caution that the RBA’s approach is likely to remain measured.
Gilbert warned against expectations of aggressive easing, noting that following a potential August cut, “we may only see one further cut until the end of the year.”
“Nonetheless, rates are coming down and that’s a win for equity markets and mortgage holders,” he said.
The inflation data comes as small businesses continue to navigate a complex operating environment characterised by elevated costs, subdued consumer spending, and ongoing labour market challenges, making any monetary policy relief particularly significant for sector confidence and investment decisions.
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