Australia’s small and medium business owners are being hit with the highest interest rates in 15 years and growing pressure not to raise prices as the Reserve Bank issues a sobering warning about the lingering inflation threat.

The Bank has hiked the cash rate by 25 basis points to 4.6 per cent in a decision in line with market expectations. It’s the fourth time this year the Reserve Bank of Australia (RBA) board has increased rates, in a hard-fought bid to bring down inflation.

“I know this decision is difficult for households and businesses with loans, but high inflation hurts all Australians, especially the most vulnerable,” says Reserve Bank Governor Michele Bullock. “Pay packets don’t go as far as they used to and that’s why we need to stop this high inflation.”

She hinted that businesses were inadvertently contributing to inflation by increasing their prices to recoup higher input costs in the wake of the Middle East cycle. But she recognised they are under pressure, a sentiment echoed at grassroots.

“Businesses have shown they can weather a tough cycle. But as the RBA seeks to bring inflation under control, further pressure on borrowing costs could make businesses far more cautious about hiring and investment,” says James Keene, APAC Managing Director at Employment Hero. “In turn, job seekers are left facing a less certain market.”

RBA Says Inflation Must Be Tamed Despite Hardship

The RBA weighed up holding or raising the cash rate but board members were unanimous in their decision to hike. Governor Bullock acknowledges widespread public commentary lamenting the impact of a rate rise on mortgage holders and on businesses, which often rely on variable loans and overdrafts. But she insists inflation is a greater enemy.

“There is nothing I can say to make households feel better. It is tough and the Board did not take this decision lightly without thinking that we knew this was going to hit some people pretty hard,” she says. “But we had to do it to get inflation back down. Hopefully, in a couple of years when we get inflation back down, it will have been worth it.”

The Governor is candid in declaring the Middle East conflict has been a major factor in inflation remaining so far above target. “It has been a big shock, and it’s made us all poorer in this country. That is a fact,” she says.

Higher energy and transport costs stemming from increased oil prices have squeezed margins for small and medium businesses, but the Board says recouping those costs from customers makes inflation worse. Central to its decision is the fact businesses have already raised prices or are considering doing so, yet it is determined not to let inflation become embedded in the economy.

“The longer it goes on, I think the more challenging it is to keep inflation expectations grounded at a level lower than what inflation is at the moment,” Governor Bullock says.

High Inflation Is Bad For Employment

While inflation has proved stubborn, some parts of its control strategy are working, with the board noting growth in output and consumer spending has slowed. The labour market remains resilient but appears to be softening in line with the RBA’s expectations.

“Our latest Jobs Report shows headcount growth rose just 0.1 per cent in August and 0.6 per cent over the past three months, the weakest quarterly growth we’ve recorded in the last year,” says Keene.

Governor Bullock says while she wouldn’t like to see job losses, she regards the labour market as still ‘a bit tight’ and the nation can’t afford it. “We’ve got to get inflation down because if we don’t, that’s really bad for employment,” she says.

She reiterates that the RBA’s strategy has been to bring inflation down while preserving gains in the labour market where possible. “That still remains the strategy but the bottom line is that productivity is doing nothing,” she laments. “Productivity is so important if we want the economy to be able to grow and create jobs.”

Businesses Must Do More To Boost Productivity

Governor Bullock notes governments could improve productivity by addressing regulation. Business groups argue reform is urgently needed. “Put simply, Australia is drowning in red tape and our living standards are paying the price,” says Business Council Chief Executive Bran Black. “That’s why the Business Council is calling for a target to cut red tape costs by 25 per cent, to help take the heat out of prices for Australian workers and businesses.”

The Australian Industry Group says the latest rate rise will ‘distress’ business owners, further impact business and consumer confidence and spending. “This makes seriously tackling our declining productivity levels, including through significant tax and regulatory reform, a national priority,” says CEO Innes Willox.

Governor Bullock says there may also be a role for financial regulators to play in making it easier for banks to extend credit and ‘grease the wheels.’ “But it’s also incumbent upon businesses to take opportunities to improve productivity. Businesses need to step up to the plate as well,” she says.

Keene says productivity challenges facing small and medium businesses are not the result of a lack of ambition. “It’s that many SMEs are still burdened by manual processes and administrative complexity that distract from growth. If we want more businesses growing to their full potential, accelerating technology adoption across the SME sector needs to be part of the solution,” he says.

While ANZ is the only big bank currently factoring in a fifth interest rate rise this year, others agree it remains a possibility. Governor Bullock left the door open, promising future decisions will be based on data and evolving assessments of the economic outlook. The next interest rate announcement is due on Melbourne Cup Day.