On Tuesday, the Reserve Bank of Australia (RBA) made a highly anticipated move—cutting interest rates for the first time in almost four years.
The reduction to 4.10% was seen as a hopeful sign for borrowers, particularly small business owners who’ve been battling rising costs. However, despite the positive move, RBA governor Michele Bullock made it clear that more cuts are not guaranteed. She noted that while some markets are anticipating further reductions, the pace of any additional cuts will depend heavily on economic data in the coming months. Bullock emphasized that the RBA’s cautious approach, which considers market expectations, is just as important as the actual rate changes, since they can shape consumer and business behavior ahead of time.
For small businesses with existing loans or those looking to borrow, the rate cut could bring some immediate relief. Lower borrowing costs make loans more affordable, easing financial pressure. This change could help businesses invest in growth, hire staff, or purchase equipment at a reduced cost. However, it’s essential to recognize that the immediate impact may not be dramatic. With inflation and high operational costs still putting pressure on SMEs, businesses should expect gradual improvements rather than quick fixes.
While some renters could see slower rental price hikes due to the rate cut, the benefits will take time. Small businesses operating in the rental market should be aware that challenges like high migration and construction delays are likely to continue impacting vacancy rates and affordability. The result could be ongoing difficulty for renters and business owners who rely on renting commercial spaces.
Be Cautious: It’s not a full solution
Consumer finance expert Joel Gibson expressed support for the cautious stance, saying, “While this cut is a relief, we must remember that interest rates are still much higher than they were just three years ago.” He cautioned that even with lower rates, small businesses will still face significant costs, including rising household and operational expenses.
Gibson also pointed out that the effects of the rate cut won’t be immediate for everyone. For example, for those with mortgages, the benefits of a rate cut might not show up immediately, since interest on repayments is often calculated daily. Similarly, the ripple effects on renters will take time, and high vacancy rates are likely to keep rental costs high.
Inflation still a challenge for small businesses
The RBA’s decision was influenced by the ongoing challenge of inflation, which, although slowing, is still above the target range. Ivan Colhoun, Chief Economist at CreditorWatch, explained that the rate cut was expected, as markets had already factored it in. Colhoun emphasized that while the RBA’s decision offers some relief for borrowers, it doesn’t mean that business and living costs have decreased—only that they’re rising at a slower pace. Small businesses should prepare for ongoing challenges, including high operational costs and inflation, even as they benefit from the reduced interest rates.
The RBA’s cautious approach signals that businesses shouldn’t expect a drastic drop in borrowing costs. Colhoun suggested that the RBA will likely signal that a significant reduction cycle is not imminent, urging businesses to stay prepared for gradual changes. While the rate cut may provide short-term relief, the real work lies ahead for small businesses in navigating inflation and other economic challenges.
