Will RBA rate hike inflict pain on ASX BNPL stocks?

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  • The Reserve Bank of Australia (RBA) is slated to meet for a cash rate meeting this afternoon.

  • Majority of economists forecast an interest rate hike.

  • A rate hike may have an impact on the ASX-listed BNPL stocks.

All eyes are on the Reserve Bank of Australia (RBA) as it meets for a cash rate meeting this afternoon. Majority of economists have forecast an interest rate hike in light of a surge in inflation to the fastest annual pace in two decades.

As per a Reuters poll, the RBA may raise rates by 0.25% on Tuesday and join a long list of central banks now expected to tighten policy at a much faster pace than previously thought. The same poll expects rates to end at 1.50% at the year end.

Similarly, Westpac has forecast a 40-basis point rise in official interest rates in June.

Interest rate hike and stock market

The impact of a rate hike is not immediate on the economy and reflects generally between 6 to 12 months. However, stock markets have been known to respond immediately to interest rate changes. This is the reason why the central bank’s monetary policy decisions are closely tracked by analysts and economists.

Borrowing becomes costlier when a central bank raises interest rates. The same cost is transferred by banks and financial institutions to customers. As a result, the mortgage and credit card interest rates rise. Consumers now have less cash in hand to spend, and this can impact discretionary spending. It can ultimately negatively impact earnings and stock prices.

How higher rates can impact the BNPL sector

Despite the ongoing challenges, the ASX-listed buy-now-pay-later (BNPL) companies have grown at a decent pace in terms of revenue, merchant sales, etc., considering the recent quarterly results. Investors now closely await earnings of sector heavyweights – Block and Zip – to gain further clarity about the future of the sector. Many small BNPL companies are slated to report earnings this week.

  • The BNPL sector is expected to feel some pressure if the RBA hikes rates later today. The primary reason behind increase in pressure is that the sector relies heavily on cheap funding.
  • In addition, weak consumer confidence in Australia is also expected to weigh on the sector.

A measure of Australia’s consumer sentiment plunged 6% last week on rate hike concerns. According to a statement by Australia and New Zealand Banking Group, the Consumer Confidence index fell to 90.7, the lowest level since August 2020.

However, online sales have grown at a decent pace. According to the Australian Bureau of Statistics (ABS), online sales in the country stood at a record AU$62.3 billion in 2020.

How have these BNPL shares fared in the past month?

Splitit Payments Ltd (ASX:SPT) – The stock rose over 78% in the past month.

Payright Ltd (ASX:PYR) – The stock fell over 5% in the past month.

Block Inc (ASX:SQ2) -- The stock fell over 16% in the past month.

Zip Co Ltd (ASX:Z1P) -- The stock fell nearly 25% in the past month.

Sezzle Inc (ASX:SZL) -- The stock fell nearly 36% in the past month.

IOUpay Ltd (ASX:IOU) -- The stock fell over 31% in the past month.

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