RBA's Lowe says SMEs in trouble: Worried by the market pricing rate rises

  • By Elizabeth Fry

Reserve Bank governor Philip Lowe said small and medium-sized businesses were doing it tough during the current lengthy lockdowns and the longer they had to wait before reopening, the greater the risk they would go bust. 

"Many are in ‘wait, survive and see’ mode, having experienced a large drop in revenue," he said in a speech to the Anika Foundation on Tuesday. 

Government assistance is helping, Lowe pointed out, but the longer they have to wait before reopening, the greater the potential damage to this important part of the economy. 

"For some businesses, there is a limit to how long they can wait. So, the sooner we can open safely the better,” adding that the economy will “contract significantly” over the three months to September. 

The governor warned that the possibility of further lockdowns posed a risk to the economy - either in response to new outbreaks of Delta, the emergence of a new strain of Covid, or a decline in the potency of the current vaccines.  

Another source of uncertainty is how Australians will respond to the easing of restrictions given that the easing is likely to take place with Delta still circulating in the community, he warned. 

“This is quite different from our earlier experience when the number of cases was close to zero, and there was a very quick bounce-back.” 

Lowe stressed that the RBA will not increase the cash rate until actual inflation is sustainably within the two to three percent target range. He argued that meeting this condition will require a tighter labour market than Australia currently has. 

“Wages will need to be growing by at least three percent. We remain well short of this,” he told the audience. 

Even in industries where there has been strong demand for labour, wage increases remain modest, he said during the speech. 

“Our judgment is it will take some time for wage increases to lift to a rate that is consistent with achieving the inflation target," Lowe said. 

The market is pricing a rate hike 

Worrying, he said this judgment stands in contrast to the expected path of the cash rate implied by market pricing. 

The market is currently pricing in an interest rate of 25 basis points (0.25 percent) by the end of 2022, 60 basis points (0.6 percent) by the end of 2023, and 100 basis points (1 percent) by the end of 2024. 

“These expectations are difficult to reconcile with the picture I just outlined, and I find it difficult to understand why rate rises are being priced in next year or early 2023," he said. 

"While policy rates might be increased in other countries over this timeframe, our wage and inflation experience is quite different.”