Will Small Business Benefit from Rate Cut?

“Now is the time for Australian businesses and households to borrow and invest,” declared Federal Treasurer Joe Hockey immediately after the Reserve Bank cut the official cash rate to a historic low of just 2%. “We encourage business to go out and spend on productive investments. Small business in particular should take advantage of record low interest rates.”

Whether businesses heed the treasurer?s advice may depend somewhat on the medium and long term effect on consumer confidence of the May Federal Budget. Chances are that many businesses will not loosen the purse strings too quickly.

That said, indications from a number of sources suggest that business confidence is on the rise – albeit tentatively. Roy Morgan Research  reported that its March Business Confidence Index showed tentative improvement of 6.7 points – up 6.3% to 112.4 – from February. Similarly, NAB?s most recent Quarterly Business Survey found improving business confidence in March – although this largely unwound a fall in confidence in February!

Overall business confidence remains fragile as shown by considerable fluctuations over recent months and remains below both pre-federal election levels and the average for the last four years. The two recent drops in the official cash rate may positively impact on businesses? plans to borrow, but this could easily be negated by strong domestic and global economic head winds.

So – can business owners expect to benefit from the most recent cut in the official cash rate? To answer this, CANSTAR has analysed business term loan and overdraft accounts on its database, comparing the reference rates on term loans and overdrafts as at 1 January 2015 and 1 March 2015. Based on this analysis:

  • Of 32 residentially secured term loans, 25 reduced their rates, all moving by 25 basis points
  • Of 34 commercially secured term loans, 27 reduced their rates, all moving by 25 basis points
  • Of 33 overdraft (residentially secured) business loans, 29 reduced their rates by 25 basis points with one loan cutting 100 basis points from its reference rate
  • Of 31 overdraft (commercially secured) business loans, 24 reduced their rates by 25 basis points with one loan cutting 100 basis points from its reference rate

While small businesses may or may not heed the Federal Treasurer?s exhortation to borrow and invest, those that do can, on balance, expect a lower-than-previous rate to be available.

 

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