Five sectors that will be hit hard by the interest rate hike

Businesses have reacted angrily to yesterday’s interest rate increase, with several sectors including retail, property and hospitality furious ahead of what they believe will be a disappointing holiday sales period.

The comments come as Canberra continues to attack the banking industry, with the Government preparing to launch a package of reform measures to keep rates under control.

Peter Strong, chief executive of the Council of Small Businesses of Australia, has said the interest rate increase will slam the retail industry especially, which is already suffering as dollars are heading overseas due to cheap shopping online, mostly based overseas.

“The resulting decrease in retail sales from bricks and mortar shops in Australia combined with the increase in rent and interest rates does not augur well for small business.”

The strong dollar has also been flagged as problem, with the nation’s currency once again hitting parity briefly overnight.

Strong has echoed calls for the Government to step up its attacks on the banking industry, saying the ACCC was right in suggesting banks are sending messages through the media as a form of price signalling.

“It is best to remember that if Australian retail is affected then many other businesses will also be affected including manufacturing, the service industries and wholesalers. This is serious and seems to have been overlooked by the RBA and not considered.”

Indeed, many businesses will be affected by the rate increase, but here are five industries specifically hurting form yesterday’s hike:

Retail

The retail industry was the first to attack the RBA for its decision, with the Australian Retailers Association saying the 25 basis point increase will negatively affect Christmas sales.

“History tells us that when consumers have to deal with increased mortgage repayments in the few months before Christmas it has disastrous impact on retail trade during the festive season,” executive chairman Russell Zimmerman said in a statement.

“The RBA’s decision today is just history repeating itself. This time last year, the RBA ruined the chance of a strong Christmas with several rate rises leading into the holiday trade period.”

The comments come just weeks after major retailers including David Jones, Myer and JB Hi-Fi said they expect solid Christmas sales. However, discounting is still rampant, and it remains to be seen whether consumers are confident enough to improve on last year’s less-than-stellar holiday sales.

Hospitality

With the hospitality industry so closely tied to the flagging tourism sector, and a skills shortage beating companies into submission, chief executive of Restaurant and Catering Australia John Hart says businesses in this industry will be hurting.

“Certainly we know that when rates go up, and mortgage payments go up, we end up with a dampening of demand for our business. We reckon that a sizeable amount of the great result we had last year was because interest rates were so low; we certainly regard rate movements as one of the most important indicators of how business is going to perform.”

Hart also says with tourism activity so low, customers are likely to stay at home and keep their money for Christmas. And as a result, growth will be lower than it previously has been during holiday periods.

“Tourism demand is quite weak, and that’s certainly going to dampen activity.”

However, Hart also jokes that the interest rate rise could help the industry’s skills shortage, saying, “If there isn’t enough demand, we don’t need to hire as many people!”

Property

The housing industry is already suffering from low demand, with price growth backing off and even decreasing in most capital cities during the September quarter.

David Airey, president of the Real Estate Institute of Australia, says this unexpected rate rise is just going to push demand lower and could potentially hurt prices if real estate agents are forced to hold on to stock for longer.

“I think it’s just another nail in the coffin. It’s such a tough market at the moment, borrowers have said they’re at the limit of what they can take.”

“Any housing bubble, although we never had one, has been stopped dead in its tracks. What’s the outlook? Pretty flat, and real estate agents are having stock at hand for longer periods. That will push up marketing costs, etc, and that will hit the bottom line.”

However, Airey says the rate rise may not hurt auction results. “I think we can probably disregard what’s going to happen to auctions. If you look at the overall market, auctions only represent a fraction of sales.”

The Master Builders’ Association has also issued a warning, saying the latest rate rise will keep the housing construction recovery in limbo.

“The timing of the rate rise will make it difficult for a private sector housing recovery in circumstances where investor confidence remains weak,” chief executive Wilhelm Harnisch said in a statement.

“The investor-driven component of the new housing market is critical in terms of ensuring an adequate supply of affordable housing that in turn is so important to Australia’s productive capacity.”

Tourism

The tourism industry has been at the mercy of the Australian dollar for the past year, and this latest rate increase has done nothing to relieve its fears. The dollar reached parity again last night, which will surely push more Australians overseas, lured by cheap airfares.

The rate increase also comes just days after the Tourism and Transport Forum released data showing sentiment among tourism operators has fallen for a second consecutive quarter – 71% said the Australian dollar is having a negative impact on their business.

Forum spokesman Rowan Barker said last week the strength of the Australian dollar is pushing more visitors overseas, and attracting foreign tourists remains a hurdle for the crippled industry. This will hurt especially in areas such as south-east Queensland, where the weak tourism market is affecting property prices.

“It’s a double whammy, makes it more expensive for people to pay off their homes, leaving less money, and more expensive for businesses borrowing money to invest and refurbish and so on. Especially when the banks believe they have a case to increase rates above the RBA.”

“It’s really hard to quantify how this will impact. But we saw the dollar jump yesterday, and we’re meeting parity, that is a big factor in tourism. Probably bad news for domestic tourism, but airports and airlines will still be pretty happy as people are heading overseas.”

Services

The services sector is moving back into positive territory, according to the latest results from the Australian Industry Group-Commonwealth Bank Australian Performance of Services Index. But as AIG chief executive Heather Ridout points out, the pressure on the Australian dollar will continue to keep any growth modest for a while yet.

“While the lift in activity during October is a positive sign for the services sector in the lead-up to Christmas, yesterday’s decision by the Reserve Bank to raise the cash rate and give monetary policy a contractionary bias will leave many businesses wary that growth in sales and new orders will prove short-lived.”