Small businesses are bracing for a triple squeeze after the Reserve Bank of Australia (RBA) lifted the cash rate by 25 basis points to 4.85 per cent this week, with retailers expected to be among the first to feel it.
The Council of Small Business Organisations Australia (COSBOA) warned the rise would land on the sector through weaker consumer spending, higher business borrowing costs and higher household mortgage repayments at once.
“Customers will spend less, business loans will cost more and, for many owners, their home mortgage will cost more too,” COSBOA CEO Skye Cappuccio said.
Cappuccio said households with variable-rate mortgages would face higher repayments and cut back on discretionary purchases, with businesses in retail, hospitality and personal services likely to be hit first.
“They will see it at the till,” she said.
Business borrowing costs are also set to rise as lenders pass on the increase, adding to costs already lifted by previous rate rises.
“For a business growing no faster than inflation, higher borrowing costs come straight out of already tight margins or the owner’s pay,” Cappuccio said.
COSBOA noted that the third impact is particularly acute because small business and household finances are often closely linked. Around half of small business credit is secured against residential property, leaving many owners exposed to higher interest costs on both fronts.
The latest State of Small Business Report from COSBOA and Square found revenue for the typical Square seller grew by 3.9 per cent over the year, against inflation of 3.8 per cent. The report also found 42.9 per cent of small business owners were working longer hours, with one in four working more for the same or less pay.
“These findings show small businesses are working harder just to hold their ground. With growth barely keeping pace with inflation, there is little financial buffer left to absorb another increase in costs,” Cappuccio said.
The RBA’s Monetary Policy Board reported that inflation remains elevated and broadly based, and is now not expected to return to the top of the 2 to 3 per cent target range until late 2027, around three quarters later than previously forecast. Its business liaison indicated many firms are experiencing cost pressures and are either raising prices or looking to do so.
The Board also noted that the economy is slowing, housing prices have fallen significantly and unemployment has risen, with higher interest rates expected to weigh on household consumption. The decision was by majority, with six members voting for the increase and three voting to hold the rate at 4.60 per cent.
KPMG chief economist Dr Brendan Rynne said the decision was designed to cool aggregate demand and push household spending even further away from discretionary categories.
“It’s this push on aggregate demand in a capacity constrained, low productivity environment that is driving inflation; and the RBA is trying to tackle this by lifting the cash rate for the fifth time this year,” Rynne said.
Rynne said it remained unclear whether the latest rise would be enough to turn inflation around and return it to target within a reasonable time.
“After two consecutive rate hikes, the RBA is likely to pause now for the Christmas period in the hope by its next meeting in February conditions may improve. If not it may very well consider further hikes to kick off the new year,” he said.
COSBOA is calling on the Federal Government to use its upcoming Mid-Year Economic and Fiscal Outlook (MYEFO) to show spending restraint and ease cost pressures on small business. Cappuccio pointed to Payday Super and the card surcharge ban as existing sources of cost and complexity, and said proposed changes to discretionary trust taxation and the Digital Duty of Care Bill should not proceed as drafted.
COSBOA is also seeking action on energy costs, a 25 per cent reduction in the cost of regulation and support for practical AI adoption to lift productivity.
“Small business owners have shown repeatedly that they will adapt, work harder and find a way through difficult conditions. But their financial buffers are running low, and they cannot be expected to absorb every additional cost indefinitely,” Cappuccio said.