Another rate rise leaves businesses paying for costs they cannot control
- Written by: The Times
The Reserve Bank wants to slow spending to contain inflation. For many Australian businesses, the immediate reality is higher borrowing costs on top of dearer fuel, freight and supplies.
The Reserve Bank raised the cash rate by 0.25 percentage points to 4.60 per cent on Tuesday. It pointed to higher global energy prices, continuing pressure on Australia’s productive capacity and signs that businesses were passing rising costs on to customers. It also left open the possibility of another increase.
For a business owner, the decision arrives as a bill, not an economic theory. An overdraft costs more. A vehicle or equipment purchase becomes harder to justify. Customers with mortgages have less money to spend.
At the same time, the cost of delivering goods and services may keep rising. Interest rates can discourage borrowing and spending. They cannot lower the global oil price.
That leaves many businesses caught between weaker demand and higher operating costs.
Oil reaches every balance sheet
The obvious exposure is at the fuel pump. Transport operators, farmers, tradespeople and tourism businesses pay directly to keep vehicles and machinery running. But oil also enters the price of freight, packaging and imported goods. A retailer may never buy diesel and still pay for it in every delivery.
The Reserve Bank says higher fuel prices have already been partly passed through to other goods and services. It is concerned that repeated price increases could become embedded in inflation.
A business facing a higher supplier invoice has three choices: absorb the increase, pass it on, or try to find savings elsewhere. None is painless. Absorbing it cuts margins. Passing it on risks losing customers. Cutting other costs may mean postponing investment or reducing hours.
Remote towns can face a sharper version of the same problem. Where diesel helps generate electricity as well as move goods, an oil shock reaches both the power bill and the supply chain. Those businesses have fewer alternatives and customers are already paying more to obtain everyday essentials.
When the remedy also has a cost
Higher rates are intended to reduce demand so that businesses have less scope to keep raising prices. The RBA says consumer spending is easing gradually and the economy appears to be slowing.
That mechanism works through real decisions. A household delays a renovation. A customer eats out less often. A company defers a new warehouse, vehicle or shop fit-out. Inflation may eventually ease, but individual businesses must survive the interval.
Borrowing costs matter especially to firms that need finance before they receive payment. A builder must pay workers and suppliers during a project. A farmer must fund a season before selling the crop. A retailer must buy stock before a customer walks through the door. Higher interest rates make that working capital more expensive precisely when fuel and freight are increasing the amount required.
Growth is not the same as productivity
Population growth brings businesses workers and customers. It can help firms fill vacancies and expand their markets. But more people also require homes, transport, utilities and public services. If supply cannot keep pace, businesses compete for scarce premises, labour and construction capacity.
There is a business opportunity in meeting that demand, but it carries a cost. New infrastructure needs materials, skilled workers and finance. Where those resources are already stretched, building capacity can add to near-term price pressure even as it provides a longer-term solution.
Migration alone cannot resolve weak productivity. The Productivity Commission reports that Australian labour productivity fell 0.2 per cent in the year to June 2026. The RBA says weak productivity is constraining the economy’s potential growth. That is a problem of how effectively the whole economy uses its resources; it cannot fairly be assigned to the people who have arrived to work in it.
For businesses, productivity is practical: better equipment, reliable energy, useful technology, skilled staff and less time lost to congestion or delays. Those improvements need investment. Higher borrowing costs can make that investment harder.
Pricing in an uncertain economy
The latest available figures put annual inflation at 3.5 per cent in July, with trimmed mean inflation at 3.6 per cent. The August figures are scheduled for release later today.
No business can plan on the assumption that yesterday’s fuel, freight or finance price will hold. Yet continually lifting prices can drive away customers whose own budgets are under pressure. The result is an economy in which owners hesitate to invest and households hesitate to spend, while essential costs keep moving.
The Reserve Bank has reason to prevent inflation from taking hold. Governments have reason to build the housing and infrastructure a growing country needs. Businesses have reason to seek enough revenue to remain viable. The harder question is whether those decisions are being made together, with their combined costs in view.
The Business Times View: A rate rise can restrain spending, but it cannot repair a supply chain or improve productivity on its own. Businesses are being asked to help absorb an oil shock while paying more for finance and facing more cautious customers. If the response to every new cost creates another cost for them to carry, today’s fix becomes tomorrow’s invoice.
