Small and medium businesses face higher borrowing costs and even tighter margins after the Reserve Bank lifted interest rates for the third time this year in another attempt to rein in inflation.
The RBA has raised the cash rate by 25 basis points to 4.35 per cent, effectively unwinding the three interest rate cuts of last year. The decision, passed by an 8-1 vote of the Monetary Policy Board, signals the Bank’s determination to bring inflation under control, despite growing fears of recession from some economists.
For SME employers, the consequences are immediate and practical. Higher interest rates push up the cost of business loans, overdrafts and equipment finance, while also squeezing household budgets and making employees more anxious about their own cost of living.
“It’s tough… it’s a very, very tough time,” says Reserve Bank Governor Michele Bullock, in summing up the competing economic threats.
James Keene, Managing Director APAC at Employment Hero, says small and medium businesses are feeling the pressure. “Today’s rate hike will push Australian businesses further into a defensive footing,” he says. “Our data is already seeing SMEs pull back on hiring and delay investment, as borrowing costs rise and consumer demand softens.”
Inflation Forced The RBA’s Hand Despite Slowdown Fears
The Board’s reasoning centred on a sharp deterioration in the inflation outlook, after the ongoing Middle East conflict drove fuel and commodity prices sharply higher. “In light of these considerations, the Board assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations. It was therefore judged appropriate to increase the cash rate target,” its statement explains.
The headline inflation figure for March hit 4.6 per cent, while the trimmed mean – which strips out extreme price fluctuations – remains above the RBA’s target range at 3.3 per cent. For SME employers, those numbers translate into higher costs across supply chains, from freight and raw materials to utilities and insurance.
Commentators have framed the Board’s choice as one between two paths, each carrying significant consequences: allow inflation to persist and risk it becoming entrenched, or tighten monetary policy further and risk tipping the economy into recession.
Several indicators suggest the economy is already feeling the strain. Consumer confidence has hit an all-time low, and business confidence is falling. The Australian dollar has risen approximately 15 per cent since November, which provides some relief on import costs but makes Australian exports less competitive and can weigh on revenue for businesses selling overseas.
Businesses Are Robust But Confidence Is Dropping Fast
The RBA notes the labour market is tracking broadly as expected, describing conditions as ‘somewhat tight’ relative to full employment. The unemployment rate was unchanged at 4.3 per cent in March, and the Bank’s modelling predicts it will end the year at this figure, before edging up to 4.7 per cent by mid-2028.
James Keene says the economic uncertainty is having an impact on Employment Hero’s SME customers. “The labour market is shifting to a more cautious approach, with casual employment growing more than twice the rate of full-time roles, up 9.2 per cent year-on-year,” he explains. “This tells us businesses are actively avoiding long-term workforce commitments in an uncertain environment. Wage growth has been flat for three consecutive months and shows no signs of shifting.”
Keene is quick to point out the reality behind the statistics. “These aren’t just numbers,” he says. “It’s businesses making increasingly difficult trade-offs. Businesses need certainty to invest in their people, and right now, they’re not getting it. It’s a trend we can’t afford to ignore.”
The RBA reports that the Middle East conflict has led to a ‘sharp drop in consumer sentiment and business confidence.’ NAB CEO Andrew Irvine has also observed a drop in confidence among the bank’s business customers. “We expect this to flow through to real activity in the coming weeks and months,” he says. “Businesses report top lines are still relatively robust, but input costs are squeezing margins, and every business faces a specific decision on whether to absorb cost pressures or pass them on.”
That decision on pricing has direct implications on staffing, since employers who absorb costs may need to delay hiring or reduce hours. Those who pass costs on risk losing customers in a market where consumer confidence is at historic lows.
The RBA’s statement indicated the Board will continue to respond to economic developments as they emerge, leaving the door open to further hikes if inflation does not moderate. The next interest rate decision is due in mid-June.
