How interest rate cuts directly affect small business fortunes

The direct correlation between interest rate cuts and the fortunes of Australia’s small businesses has been laid bare, with a powerful chart showing sales surge after a cut and nosedive when on hold.

The direct correlation between interest rate cuts and the fortunes of Australia’s small businesses has been laid bare, with new data showing sales surge immediately after a cut, and nosedive when rates are put on hold.

New data from accounting software provider Xero showed sale revenue across Australian small businesses only grew by 3 per cent over the June quarter compared to last year - the slowest growth rate since 2020.

However, the report suggested the Reserve Bank cutting the cash rate in February and May had a short-term boost to consumer spending in the following months.

It reported small business sales slowed in February from the month before to 2.1 per cent growth year on year, before jumping to 6.3 per cent in March.

April and May had a softened growth rate of 1.6 per cent year on year, before spiking in June after the May rate cut, up to 5.9 per cent.

A Brisbane cafe owner has backed up the findings, saying customers are spending more as interest rates have come down.

Adam Thomson, owner of the Dovetail Social and Dovetail on Overend cafes in Brisbane, said he had seen a rebound this year, after customers’ average spend plunged in 2024.

“Normally, most of our customers would be spending for a meal and a coffee, and maybe a dessert, whereas last year, people were either sharing a meal or they would come out... and they would buy a dessert and a drink,” he said.

“I believe there were some rate cuts that happened that just improved people’s financial outlook and eased the pressure a bit.

“People really returned to their normal spending habits this year.”

Adam and Rejoice Thomson, with daughter Bella, who works as a barista in the Dovetail business. Image: Supplied

The Dovetail cafes, which have carved their own niche of having a completely coeliac friendly menu, now has seen high demand for its gluten free high teas, Mr Thomson said.

He added the business had multiple bookings for the high tea experience each week, showing customers were happier to indulge.

“I think people have really been feeling a lot more confident to go out and really just enjoy what we can offer and experience it,” he said.

“I know a lot of other cafe owners... and I think they’ve all had a pretty similar experience to us.

Adam and Rejoice Thomson, owners of the Dovetail Social and Dovetail on Overend cafes. Image: Supplied

Mr Thomson said many small businesses in Brisbane were also anticipating the 2032 Olympics.

His business is considering the addition of a third location ahead of the games, he said.

Queensland and WA small businesses outperformed the other states in the June quarter, with sales up 4.2 per cent and 4.6 per cent respectively.

South Australian small businesses also recorded sales growth above the national average, up 3.4 per cent year on year.

NSW was just below the national average, with 2.7 per cent growth in sales.

Victoria, Tasmania and the ACT had more modest increases, with their sales growth ranging between 1 to 1.8 per cent year on year.

Dovetail on Overend owner, Adam Thomson. Image: Matthew Poon

Xero economist Louise Southall said businesses were “still operating in a challenging environment”.

“Easing inflation may pave the way for further rate cuts, which could help lift consumer spending and ease the pressure of loan repayments for small business owners.

“However, uncertainty remains, particularly as global trade tensions, including US tariffs and their flow-on effects in China continue to pose potential risks.”

Across industries, small businesses in public administration were the strongest, with sales up 7.9 per cent year on year, although its growth previously was in double digits in the two previous quarters.

Health care and social assistance businesses average 7 to 8 per cent over the last three quarters, likely due to ongoing government investment and increased demand for the National Disability Insurance Scheme and aged care, Xero reported.

Meanwhile sales in education-related businesses were down 1.2 per cent year on year, likely due to an ongoing decline in international students, the report said.

Originally published as How interest rate cuts directly affect small business fortunes