Asymmetric changes in Australia’s small business loan rate

Abstract

This paper examines the dynamic asymmetric relationship between changes in the Reserve Bank of Australia’s (RBA) cash rate and the interest rate for small business loans using monthly data (1990-2011). The results provide support for the rockets-and-feathers hypothesis with respect to both the amount and adjustment asymmetries. While the RBA’s rate rises exert a one-to-one and instantaneous impact on the loan rate, its rate cuts are only slowly and partially passed onto small businesses with a delay of 1-2 months. The results also suggest that the recent global financial crisis increased the cost of borrowing for small businesses in Australia by 2.21%. These findings indicate that small businesses have limited time to respond to interest rate rises and not provided with the full benefit of interest rate decreases. Addressing this problem should ease the interest rate burden for small businesses and enhance their contribution to the economy.