Big banks in Australia are likely to keep lifting interest rates to small- and mid-sized business clients as part of their bid to recover funding costs.
The increase in interest rates will be another hurdle for the sector, which remains volatile in today’s economic condition. Many small- and medium-sized businesses have found it hard to obtain financing over the past two years as profits declined.
A joint review of finance consultants Fujitsu Australia and investment bank JPMorgan showed that big banks have significantly tightened their grip on the sector, as small- and medium-sized players faced funding constraints or pulled out of the market altogether.
Scott Manning of JPMorgan said the average cost of funding of banks would keep increasing over the next five years. This will likely spur rate increases for small businesses beyond official moves in the cash rate.
“As the cost of funding stays high for the banks themselves, they’ll be looking to pass on that burden to the sector,” said Mr. Manning. “This means the rates for this sector will remain quite high.”
With lending to smaller business drawing less political scrutiny, many big banks will find it easier to impose out-of-cycle interest rate hikes.
While there were indications that higher rates paid by small businesses had contributed to subsidizing bank mortgage books at the onset of the credit crisis, more recent rate hikes reflected repricing of risk and higher credit costs, said Mr. Manning.