Reserve Bank keeps cash rate at record low: What does it mean for SMEs?

reserve-bank

RBA governor Dr Philip Lowe. Source: AAP.

Small businesses can expect variable rates on SME loans to remain low and a more competitive labour market following the Reserve Bank of Australia’s board meeting yesterday.

On Tuesday, the Reserve Bank decided to keep the April 24 bond as the bond for the yield target, to continue buying government bonds after the current $100 billion bond purchase program finishes, and to maintain the cash rate target at 0.10%.

Leading economist Saul Eslake says despite the Reserve Bank’s view that it won’t need to start raising the cash rate until 2024, there’s a growing chance that it will move earlier than that.

Interest rates on SME loans

Small businesses can expect a future change in the cash rate to lead to higher variable rates on SME loans of at least the equivalent amount.

“The second implication is that fixed rates have actually already started to rise and will probably rise further even before the Reserve Bank starts lifting the official cash rate,” Eslake tells SmartCompany.

The increase in fixed rates is due to the fact that they are priced off longer term rates in the bond market, including two-, three-, five-year rates.

“Those rates aren’t set by the Reserve Bank, they’re set by financial market participants, including on the basis of their expectations as to what the cash rate is going to do,” Eslake says.

Reserve Bank Governor Philip Lowe doesn’t intend to increase the cash rate until inflation is sustainably within the 2% to 3% range. And, for inflation to be sustainably in that target range, it’s likely that wages growth will need to exceed 3%.

Tightening labour market

Lowe acknowledged an increase in labour shortages in parts of the economy, and a step-up in wage increases for some occupations. However, he said such shortages haven’t resulted in meaningful wage increases for most Australians.

According to Eslake, the primary reason the unemployment rate has fallen faster than expected is due to the ongoing closure of Australia’s borders. Border closures have prevented both permanent and temporary migrants from freely entering the country.

“This means that those who are here don’t face nearly as much competition as they might traditionally have faced,” he says.

Given Australia’s international borders are expected to stay closed until mid-2023, there’s a strong likelihood that the unemployment rate could continue to fall much more quickly than the Reserve Bank expects.

“Some employers simply won’t be able to fill the vacancies they have,” Eslake says.

Employers having trouble recruiting staff may be pushed to offer higher wages, which is in fact what the Reserve Bank is hoping businesses will do.

“That’s certainly beginning to happen in the United States, where there’s a similar issue,” Eslake says.

Employers may also need to consider offering training and development to new and current staff who don’t have the skills they need, he adds.

In May, the unemployment rate fell to 5.1% which is lower than pre-pandemic levels.