Fiscal pressures on businesses remain following rate hold

A general sentiment of uncertainty has been expressed by numerous bodies in light of the Reserve Bank’s decision earlier this week to keep the cash rate at its present level of 4.35 per cent.

CPA Australia has described the decision as a welcome yet brief reprieve that has not quelled financial anxiety, especially for households and small businesses.

“The reality is that cost pressures remain high – inflation is still persistent across essential goods and services, fuel costs remain volatile, and consumer confidence continues to be subdued”, CPA Australia business and investment lead Gavan Ord said.

Similarly, transport and fuel-dependent small businesses “are operating with very little buffer”, in light of unpredictable cost and availability, the impact is compounded by higher interest rates and weaker demand.

Fragile economic confidence has led to reduced household discretionary spending and delayed business investment, Ord added.

“Many businesses would have been hoping for a clearer signal that conditions are easing, instead we’re seeing a holding pattern at a time when both households and businesses are still dealing with significantly higher costs than they were even 12 months ago.”

In turn, “these increases are inevitably passed on. We expect continued cost pressures at the checkout as small businesses try to balance rising inputs with maintaining viability”, Ord said.

In the same vein, BDO chief economist Anders Magnusson characterised the RBA’s decision as a demonstration of the “difficult balancing act between signs that economic activity is slowing and the risk that inflation remains too high for too long”.

He warned that “inflation is becoming harder to contain” but noted that the labor market is starting to cool, which should reassure the RBA that past decisions are taking effect.

However, it remains that “the adjustment is modest and there is still uncertainty about how quickly it will flow through the broader economy”. In this vein, Magnusson also warned that effects of the energy shock are still playing out, and are expected to do so “even if there is a quick resolution to the conflict in the Middle East”.

“The risk remains that further increases may be required if underlying inflation does not ease. Next week’s read on inflation will be critical, as evidence that underlying inflation is accelerating could prompt a further cash rate increase in August”.

CPA Australia also responded to the RBA decision by calling for the government to implement long-term reforms to ease small-business operations, including the removal of red tape.

Ord said: “Removing unnecessary regulatory burden helps businesses focus on growing, employing people and serving customers.”

“Short-term relief can help, but it won’t fix a system where businesses are dealing with persistent cost pressures and regulatory complexity.”

While the RBA’s decision by no means rules out further rate hikes, and many are wondering how long the rate can be held steady, the next month will be a collective waiting game for all.

Magnusson said: “Today’s decision should not be interpreted as a sign of victory over the inflation scourge”.