Inflation and interest rates - what do they mean for your business?

The 2024 Financial Year continued to bring many changes in economic conditions. Top of the pile has been persistent inflation, and interest rates remaining high.  Consumers and businesses are not immune to the continuing impacts of these indicators. 

Understanding the economic situation and impacts to businesses can be complex. We asked David Robertson, Chief Economist, Head of Economic and Markets Research at Bendigo Bank to give us an overview. 

Key takeways from the 2025 Federal Budget

Before we talk interest rates and inflation, let’s talk briefly about the 2025 Federal Budget. 

The Australian Government delivered a small budget surplus this year. This was helped by firm commodities and strong labour markets and offset to a degree by the stage three tax cuts. Cost of living support incentives to address housing affordability and energy bill relief will offer good support to businesses, but their impact on inflation will be modest. 

“The $20,000 asset write off will once again be available to around 4 million eligible small business in FY2025. This incentive may help to offset some inflationary pressures for SMEs,” David said.

High inflation persists

Inflation, or the rate of increase in prices over time, is the key factor driving our economy. David explained that some inflation was expected as our economy re-opened after the disruption of the COVID pandemic.  Since then, the impacts of the war in Ukraine, local weather-related disruptions and tight labour markets have driven inflation much higher than is ideal.

“Inflation is everyone’s worst enemy,” David said. “It increases the costs of inputs, reduces the value of wages and makes everything less affordable.” Many businesses will have noticed continuing higher costs for inputs including energy and fuel, which they may have had to pass onto consumers.

“Meanwhile, real household disposable income has declined by its largest amount since the 1991 recession. This is due to higher prices, a larger tax take and higher interest rates. It’s directly impacting consumer demand, and can be seen in the plunge in retail sales.”

Interest rates affect consumer spending

Inflation has a negative impact across the whole economy. Australia’s central bank, the Reserve Bank of Australia (RBA), has been addressing this by increasing the cash rate.  Interest rates were historically low during the pandemic, but in the period from May 2022 to November 2023, there were 13 consecutive interest rate rises. This increased the cost of debt for businesses and households.

The RBA has kept rates on hold since December 2023. David predicts that there are not likely to be cuts any time soon, either.

"Inflation falling from its peak of 7.8 percent at the end of 2022 to 3.6 percent in the beginning of 2024 is good news. However, inflation continues to be stubborn, and probably won’t be low enough to reduce interest rates in 2024,” he said.

“Bendigo Bank’s view for over a year has been that RBA rate cuts will start in 2025. This will help support the slowing economy. We’re expecting however that the easing cycle won't start in 2024 because of how difficult it is to eradicate inflation.”

David said Australian consumers and business will need to get used to the period of higher interest rates for a little while longer. “Weaker retail sales numbers have been a reminder that households are still cutting back on discretionary spending. This behaviour will flow through to businesses as reduced demand for goods and services, particularly discretionary items.

“Continued high interest rates also poses a challenge for businesses, with a higher cost of borrowing dampening their growth plans.”

While consumers and businesses are still braving the economic environment, David’s view is that the outlook is not all bad.  “We are likely to have a softer landing than many other countries, which are facing recession. We’re still expecting very slow economic growth and domestic demand ahead.

“But with China opening up after the pandemic and firm commodity prices, the main bright spots are coming from international demand, including tourists and students, and strong public investment.  This will drive demand for many goods and services, and also impact the labour market,” he said.

Labour availability is increasing

With unemployment recently at a 50-year low, many businesses have found it hard to fill vacancies over the past year. But David explained that this pressure is likely to be eased by the return of international students. As well as increasing demand for goods and services, international students play an important part in the labour market.

There has also been an increase in migration, which is bringing a flow of skilled labour. “Together, these factors are likely to increase labour availability and ease the situation for business,” he said. 

Helping businesses ride out the economic conditions

David’s advice for businesses? Stay up-to-date with what’s happening to the economy, and to factor the changing circumstances into your planning. Be agile adapting to changing sources of demand.

“We know that this period continues to be challenging for many businesses,” he said. “It’s important for businesses to plan around the economic conditions. Recognise that there are now higher costs of debt. Ensure that you have a robust and realistic business plan in place. This should factor in those higher costs and sets your business up to weather the situation.”

You can find regular economic updates at our business insights hub. The Bendigo Bank business experts can also provide support, to help you make informed decisions as you plan for the future.