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IN BRIEF
- The RBA has increased the cash rate by another 25 basis points to 4.35 per cent in an effort to combat inflation.
- For small business owners like Sina, the decision could well spell collapse for services already feeling the strain.
Just last month, Sina Klug, the owner of a beloved gluten-free bakery in Sydney called Nutie, made the devastating decision to close her doors after nearly 11 years of business.
Despite having what she described as a “good landlord,” Klug shared with SBS News that she simply couldn’t make the financial side of her operation work anymore.
“We survived the COVID-19 pandemic with this business,” Klug explained to SBS on Tuesday. “We were extremely proud of ourselves, believing we had overcome the worst. However, the past few years have felt like reliving the pandemic, only this time without any government support.”
Klug noted that although the number of customers remained fairly consistent, the business was overwhelmed by financial strains due to rising inflation and increased interest rates. She expressed concern that the Reserve Bank of Australia’s (RBA) recent decision could lead to similar challenges all over again.
On Tuesday, the RBA announced its decision to increase the cash rate by 0.25 percentage points, bringing it to 4.35 percent. This move has sparked fears of further financial pressure on businesses like Klug’s, which are already struggling to navigate the economic landscape.
RBA Governor Michele Bullock said that inflation had to be tackled now in order to prevent runaway cost increases further down the track. Headline inflation spiked to 4.6 per cent in March, largely due to the sharp rise in fuel costs driven by the war in the Middle East and the closure of the Strait of Hormuz.
“We must get on top of inflation now so that it doesn’t get away from us,” she told reporters on Tuesday. “If left unchecked, higher costs get embedded into price and wage-setting decisions.
“These second-round effects could lead to even higher and persistent inflation, and if so, would require even more tightening in monetary policy to get inflation under control.”
For small business owners like Klug, the news is “really scary” and she expects to see her customers immediately restricting their spending in response to the decision.
Following the decision on 12 April to close Nutie, Klug is now wondering whether her second and final bakery, Miss Sina — in the Sydney suburb of Marrickville — will also have to shut.
“Tomorrow, people will stop spending,” she said. “They will have to tighten their belts more, and there’s only so far you can tighten your belt.”
“This is really scary, because the situation just keeps getting worse for small businesses and also for the consumers this year.”
Inflation increases expected to peak in June
While the impacts of the war in the Middle East – now in its second month – have yet to fully materialise in Australia, Bullock has said there is little that can be done now to avoid them.
“These interest rate rises are not going to do anything for inflation for the next six months,” she said.
The RBA is forecasting that headline inflation will reach 4.8 per cent in June, which is expected to come down if oil prices also start to fall by then.
While the war in the Middle East is expected to continue to drive inflation through the increase in fuel costs, fertiliser, and other essentials, Bullock argued that inflationary pressures were already systemic in Australia prior to the outbreak of the conflict at the end of February.
“This oil shock — that has been driven by what’s going on in the Middle East — has complicated things immensely. It has made a trade-off for us much worse,” she said.
“For any given inflation rate now, that means lower growth, that means higher unemployment.”
The RBA has forecast gross domestic product growth to dip to just 1.3 per cent by the end of the year, something that Bullock has said is “pretty anaemic,” but that a pullback in consumer spending could tip the balance toward recession.
“We are all feeling poorer,” she said. “That’s what this has done, this war on the other side of the world.”
Bullock said the RBA would be monitoring spending closely over the coming months to assess the impact of rising interest rates.
Businesses feeling the strain
With rising interest rates designed to enforce a controlled pullback on consumer spending, the RBA hopes that inflationary pressures will start to ease as its measures take effect. For small business owners like Sina though, such a pullback could be devastating.
“There’s only so many times you can put your own prices up and customers can still afford it,” she said.
“People do have less money. They pay more on mortgages. There’s a cost-of-living crisis. We’re being hit from two sides, and it’s just not sustainable anymore.”
Klug hopes that the forthcoming federal budget will deliver some relief similar to what was handed out during the pandemic.
However, Treasurer Jim Chalmers has signalled that Australians should not expect financial measures that could push inflation higher when he hands down his budget on 12 May.
“It’s our livelihood that’s on the line,” Klug said. “At the moment, we’re getting no support whatsoever. There’s nothing.”
“All we’ve done for the past year is try and reduce our costs. We’ve streamlined, we’ve cut costs where we can.
“We can’t save anymore. Our only option at some point will be to close the business.”
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