Start-ups that combine home and business loans will continue to be hit by interest rates, with two of the big banks lifting their interest rates above that of the Reserve Bank.
ANZ has joined the Commonwealth Bank in trumping the Reserve Bank’s rate rise, sparking anger from the Federal Government and the public.
The decision by ANZ to raise its standard variable rates by 39 basis points to 7.8% followed the RBA’s 25 basis point rise.
CommBank increased its standard variable rate by 45 basis points, nearly twice the RBA’s official move.
Last week, Treasurer Wayne Swan said the government planned to introduce a series of reforms aimed at boosting competition among Australia’s banks, which dominate with a combined share of almost 90% of the mortgage market.
Shadow treasurer Joe Hockey has also called for steps to increase competition in the industry.
ANZ chief executive officer Philip Chronican says the bank has taken a “commercial decision” to increase variable interest rates.
An ANZ report states: “The intense competition for deposits and high wholesale funding costs is very real and has continued to increase the average cost of lending.”
Westpac and NAB have yet to announce their new lending rates, although NAB economist John Sharma says the bank has reduced its cash rate projections.
“We’ve lowered our interest rate forecast partly because we expect the banks to do some of the work of the RBA,” he says.
Nevertheless, Sharma is encouraging small businesses to negotiate with their financial lenders as rates take their toll.
“I’m sure they can work something out with their financial provider – if they can have some sort of holiday period or something like that to help them in the initial phases,” he says.
Dr Peter Brain, from the National Institute of Economic and Industry Research, predicts interest rate rises will continue to go up by at least another 1%.
“I don’t think the interest per se is an issue. What is an issue is the uncertainty of the availability of finance,” he says.
“I think that the current hoo-ha [surrounding interest rates] really just adds to that uncertainty and it is an enhanced risk and therefore it must be a negative on start-ups.”
“As we’ve seen, the current interest rate pressure is not just coming from domestic fundamentals but it’s coming from the need for the banks to roll over their foreign obligations.”
“If international conditions worsen and there’s further upward pressure on interest rates from overseas, or simply a credit squeeze is imposed on the Australian economy, then their criteria will go up.”
Brain says with so much uncertainty, start-ups shouldn’t treat their loan as a long-term overdraft.
“Make sure that you treat the loan as not always being there but as a strategic investment. Treat the loan as you would an employee – you hire an employee to achieve specific objectives,” he says.
“As with your employees, your loan should be tailored to meet your objectives so that at the end of it, you’ve got something that strengthens the cashflow of the business or at least reduces the reliance of the business on loan capital.”