Rate cut passed on to business loans – but do they even matter anymore?

Three of the four major banks have now confirmed their decisions to pass on last week’s RBA interest rate cut will extend to business products.

But the good news may be short-lived. Recent business confidence surveys have revealed a disconnection between interest rate cuts and SME optimism, begging the question – does business even care about interest rates anymore?

The Commonwealth Bank, NAB and Westpac all confirmed to SmartCompany their interest rate cuts extend to business products. This comes just two months after another interest rate cut was passed on to business customers.

ANZ will make a decision about cutting its rates at its monthly meeting on Friday.

All three banks have cut their lending rates by 20 basis points. NAB’s variable lending rate now sits at 6.38%, while Westpac is at 6.51% and the Commonwealth Bank is at 6.4%.

But despite claims from business that interest rate cuts are sorely needed, the rate cuts don’t seem to be improving business sentiment.

The most recent NAB business survey found confidence has plummeted to levels not seen since April 2009. Although this survey was taken before the latest cut, it represents a decline since the October RBA cut.

Consumer sentiment surveys have revealed similar findings. The October result of Westpac’s monthly consumer survey was surprisingly poor, although it experienced an increase in November.

The results suggest confidence remains disconnected from actual interest rate movements.

CommSec economist Craig James says while interest rates still do have an impact: “They can get lost in the mix of other things which are happening at the moment”.

“I think one of the bigger issues at the moment is that businesses are keen on reducing debt, rather than producing it. So you may think an interest rate is good, but if you aren’t taking on debt then it may not matter all that much to you.”

The ongoing debate between lenders and SMEs continues, with businesses arguing that banks don’t want to lend. Naturally, lenders say the opposite – that they just aren’t seeing a lot of activity.

Greg Evans, director of economics and industry policy at the Australian Chamber of Commerce and Industry, says the low confidence caused by international economic turmoil results in a lower rate of financing applications.

“Even with the benefits of lower interest rates, businesses aren’t going out to invest.”

“No matter how low the rate is; businesses just aren’t in a position where they want to borrow more.”

The usual suspects are clear: financial turmoil in Europe, a high dollar and the looming possibility of a change in federal government.

But James says early signs of recovery could blossom in 2013, leading to a business environment where more SMEs take advantage of lower interest rates.

“I think once we get into 2013, we’ll see people more confident. We’ve already seen signs the economy is improving in the United States, and in China. The European economy is improving and so is investor sentiment.”

 

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