The market is 50/50 on an interest rate hike, CommSec says, as small businesses borrowers await today’s news

Tuesday is shaping up as a significant day for Australia’s small business sector, with mainstream economists and the big banks largely convinced the Reserve Bank of Australia (RBA) will lift the cash rate for the first time in more than a decade.

Rampant inflation and the overall resilience of Australia’s economy after COVID-19 lockdowns will likely convince the central bank to lift the rate from just 0.10% to 0.25%, according to ANZ, NAB, and Westpac, all of which expect a rate hike sooner rather than later.

The Aussie market is only a touch lower (-0.15%) ahead of the #RBA's monthly meeting this afternoon. The market is currently pricing in a ~50% chance of a 15bps or 0.15% lift at 2:30pm AEST.

— CommSec (@CommSec) May 3, 2022

Such a change would ripple through to borrowers across the country, jacking up mortgage repayments — and repayments on variable-rate business loans.

Commonwealth Bank — the only one of the big four banks now projecting the next rate hike in June — states financing for small business investments in equipment and machinery is up 17% so far this financial year compared to the same period last year, reflecting the sector’s appetite for expansion.

While bank interest rates are already rising ahead of an official RBA cash rate hike, a 0.15% lift on Tuesday would surely impact some of those newer loans, driving up the cost of variable repayments.

Given soaring input costs, and the threat of consumers lowering their discretionary spending in response, any uptick in repayments is likely to clamp down on highly-leveraged businesses.

However, Grant Cairns, the bank’s executive general manager for business lending, maintained that a suite of government incentives are likely to result in a “continued uplift in small businesses investment,” even if rates tick upwards.

An even bigger question: how many cash rate hikes are in store.

Today’s inflation rate is complex, driven by supply chain shortages, market concerns over conflict in Ukraine, and the massive tide of pandemic-era stimulus payments pumped into the economy.

In its pre-RBA meeting analysis, Creditorwatch chief economist Anneke Thompson says it’s “difficult” to pinpoint how high interest rates will go, and how long it will take them to get there.

The impending federal election is another complicating factor, she says.

“Certainly, major spending promises by both sides of politics won’t help the issue from a fiscal policy perspective, and it may be that in the upcoming federal budgets, capital projects are reduced to try to reign in the spiralling cost of doing business — particularly in the construction sector,” she said.

The RBA will deliver the results of its monthly meeting at 2.30pm today.