CBA executive backs RBA on rates as small businesses struggle

The business banking boss said small businesses are bearing the brunt of the cost-of-living crisis crunch and higher interest rates.

CBA’s group executive for business banking Michael Vacy-Lyle. Picture: Nikki Short

Commonwealth Bank’s business banking boss says small businesses are bearing the brunt of the cost-of-living crunch and higher rates, but has defended the Reserve Bank’s rate rises as a necessary measure to rein in inflation.

Mike Vacy-Lyle, who has overseen the bank’s business portfolio since February 2020, said small businesses were holding back on investment amid a battle to stay afloat, as they navigated an economic downturn that was hitting hospitality operators and discretionary retailers the hardest.

“There’s definitely two speeds at play here,” he told The Australian during a national roadshow meeting with CBA bankers in Adelaide on Tuesday.

“On the smaller end, there’s demand for working capital to keep funding the working capital of their business. But I would say there’s a lot of people in that bottom end who are, given their confidence levels, probably trying to de-gear rather than gear.”

While consecutive interest rate rises were “taking a toll” on small business owners, Mr Vacy-Lyle said the Reserve Bank had “done a good job” of balancing the need to reduce inflation while supporting economic growth.

“To go from 10 basis points to 435 basis points in the period that we did is unprecedented, and that absolutely has had a significant impact, as it should have,” he said.

“We’ve been in an inflationary environment, and the way to bring down inflation is to respond with interest rates. And we know that has taken a toll, it’s had an impact, and we’ve seen the economy slow on the back of that. But I think the RBA has done a good job.

“Businesses have seen not only an increase in borrowing costs, but on top of that inflation has been stubborn, so they’ve had a significant increase in input costs and ­labour costs.

“Put those together and it’s been tough. It’s hard to run a small business in this current environment, and we’re very sensitive to that.

“There are certain sectors that are feeling the pressure more than others. We’re seeing it a lot in hospitality, so smaller coffee shops, restaurants feeling it, particularly in certain CBDs – Melbourne would be a good example, where people coming back into the city has been slower than other cities.

“We’re also seeing some discretionary retail businesses under pressure, particularly the smaller ones.”

Mr Vacy-Lyle’s comments follow Treasurer Jim Chalmers’ declaration that the ­RBA’s rate increases were “smashing the economy”, and come ahead of Wednesday’s release of GDP figures that are expected to underline a slowing economy.

Mr Vacy-Lyle said the figures would influence the RBA’s next move on rates, with CBA forecasting a first rate cut as early as the end of 2024, but more likely in the first quarter of 2025.

Mr Vacy-Lyle unveiled a new strategy for CBA’s business banking division in June designed to maintain and increase its market share in a highly competitive market favoured by the big banks, other lenders including Macquarie and Judo, and private credit funds.

The strategy includes the introduction of its CommBank Yello loyalty scheme for small and ­medium businesses, allowing them to receive special offers and discounts on business-related purchases. Flexible term deposits have also been launched, allowing business customers to withdraw up to 20 per cent of their balance without incurring fees.

According to CBA figures, the bank commands a 25.5 per cent share of the business banking market based on main financial institution (MFI) relationships, measured by the number of business customers that nominate CBA as their main financial institution.

Mr Vacy-Lyle said the focus was now on converting those relationships into more business lending, where rival NAB currently leads the market.

“We’ve got 18.5 per cent lending share – we’re second in lending share but number one by a considerable margin on main bank relationship, so now we can grow into ourselves,” he said.

Originally published as CBA executive backs RBA on rates as small businesses struggle