The message has come loud and clear that more interest rate hikes are coming, and history says the banks will raise rates at a faster rate than the Reserve Bank to cover wholesale funding costs.
This week was not the time for out-of-cycle rate rises in the middle of an election campaign and multi-billion-dollar profit announcements, but the fact is the RBA rate is just one factor considered by the banks.
One economist who declined to be quoted said on pure economics the banks should have raised rates by 55 basis points, not 25 points.
There are other factors to consider, such as how customers react, and this may well have a bigger impact on small business.
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The impact on the economy also dictates how many rate hikes there will be, and market psychology is a big factor.
The rate increases above the RBA rate are based on the bank bill swap rate, which is influenced by local and offshore bond markets.
Even excluding the impact of wholesale rates, Westpac’s Bill Evans expects official RBA rates to be as high as 1.75% at calendar year’s end, from 0.35% today.
Judo Bank’s Joseph Healy says business reacts differently, and while households may pull back discretionary spending, a small business can’t do that if it wants to continue running.
“We are not seeing increases in stress across our portfolio,” he tells SmartCompany.
Judo lends to the business, not the business owner’s home, so the factors vary.
Banks will have one buffer against increased wholesale rates with the $188 billion in funding provided by the RBA through the term funding facility, which provided three-year money at 10 basis points.
This scheme ended in June last year but the funds are in place until 2024.
Each of the big four banks have to find around $25 billion in new money each year to fund their home loans, which explains why the RBA cash rate is just one factor in their decision.
Healy says business relying on discretionary spending will face a slower economy in the immediate future depending on how wages hold up.
The big retailers have promised to support staff with higher wages to help match cost-of-living increases.
The rate hike comes as small business confidence took a dive earlier this year with the impact of the Omicron outbreak.
Confidence levels are still high according to the latest NAB surveys, but next week’s monthly survey may well show a further hit due to the RBA’s move.
“The impact of the Omicron outbreak on SMEs was evident in the quarter one survey, just as it was for larger firms in our quarterly survey, with confidence softening from the high levels reached at the end of 2021,” said NAB chief economist Alan Oster.
“Conditions also eased for SMEs in Q1, with trading conditions and profitability down,” Oster added in his quarterly survey issued last month.
He noted: “SMEs reported weaker conditions in every state, with the largest falls coming in South Australia and Western Australia.”
“Unfortunately, conditions remained very weak for SMEs in the hospitality sector, which has continued to face disruptions from the pandemic.”
Healy says there is a built in buffer in small business loans at 2% above prevailing market rates.