After two years of relative calm, the Reserve Bank of Australia has reminded everyone who’s boss, announcing a rate rise that is liekly to hit households and businesses hard.

The RBA lifted the official cash rate by 25 basis points to 3.85 per cent, marking the first rate hike since November 2023. The move delivers an unwelcome jolt to households and small business owners who were just starting to catch their breath.

The rate rise comes after inflation picked up in the second half of 2025, surprising policymakers who had hoped the worst of the inflation fight was behind them. Instead, the RBA says demand is running hotter than expected, the labour market remains tight, and capacity pressures are sticking around longer than planned.

The latest hike lands with a thud for  small business owners  who are already dealing with 2026 increases such as higher wages and operating costs and payday super on the horizon.

As CPA Australia commented “For many, there are no easy options left.”

Why the RBA hit the brakes again

According to RBA Governor Michele Bullock, fresh data forced the Bank’s hand.

“The recent run of data gives the board a clear-enough view that the underlying momentum of inflation is too strong,” Bullock said after the decision.

She said the board had updated its outlook and concluded that the cash rate was “no longer at the right level to get inflation back to target in a reasonable time frame”.

In its Statement on Monetary Policy, the RBA pointed to a broad-based rise in prices, stronger-than-expected household spending, resilient investment, and a housing market that’s picking up pace again.

“Growth in private demand has strengthened substantially more than expected,” the statement said, adding that financial conditions eased throughout 2025 and that earlier rate cuts are “yet to flow through fully to aggregate demand, prices and wages”.

In other words: the economy didn’t slow down as much as the RBA expected, and inflation didn’t get the memo.

‘Not a great outcome’ but the alternative is worse

Bullock acknowledged the pain this decision will cause, particularly for borrowers.

“I understand that people will be disappointed,” she said. “It’s not a great outcome.”

But she defended the decision, warning that letting inflation linger would be even more damaging.

“What’s also not great for them, or for anyone else, is if inflation remains elevated,” Bullock said, pointing to the ongoing risk of rising grocery bills, medical costs and everyday expenses.

“Ultimately, it is best if we get inflation under control, and our instrument is the interest rate. The alternative is potentially even harder.”

That message may not soften the blow for business owners staring down higher repayments, but it does signal the RBA is prepared to wear some unpopularity in the short term.

Was the RBA wrong to cut last year? Bullock says no

Bullock also pushed back against suggestions that the RBA’s August 2025 rate cut was a mistake.

“People should judge decisions based on the information available at the time, not with the benefit of hindsight,” she said.

“At that point, demand was soggy, inflation was coming back, it was in the band, everything was in line.”

“I think we were doing the right thing,” she added. “Circumstances change, we change.”

That flexibility is likely to be cold comfort to businesses who took those cuts as a sign the coast was clear.

Less buffer, more pressure for business owners

For many small businesses, especially those carrying debt, the timing couldn’t hardly be worse.

Grant Austin, CEO of pay.com.au, said the move “effectively wipes out the gains from 2025’s run of pauses”.

“For many Aussie SMEs, that brief dip to 3.60 per cent was a lifeline that allowed them to keep staff on board and prices competitive,” he said.

“Now, that buffer is gone. This is a blow to the survival of the Australian engine room — SMEs.”

Austin warned that rising borrowing costs are already pushing some businesses to the brink.

“We are seeing businesses that were keeping the wheels turning suddenly stall, as the cost of commercial facilities and loans grind their momentum to a halt.”

Hospitality remains the most exposed sector. CreditorWatch data shows nearly 11 per cent of cafes and restaurants closed over the past year, almost double the national average.

“In an industry where margins were already razor-thin, this hike is a dangerous catalyst for more collapses,” Austin said.

‘No easy options left’ for business owners

CPA Australia mirrored those concerns, saying the hike will further dent confidence.

“Small businesses remain under pressure from high borrowing costs, rising inflation and low consumer confidence,” said Gavan Ord, CPA Australia’s Business and Investment Lead.

“For many, there are no easy options left.”

Ord warned that some businesses will be forced to pass costs on to customers, while others may shelve investment and growth plans altogether just to protect cash flow.

CPA Australia is calling for longer-term reform rather than short-term relief, including cutting red tape and improving access to professional advice.

“Removing unnecessary regulatory burden helps businesses focus on growing, employing people and serving customers,” Ord said.

Are rate rises even working anymore?

Some economists argue that higher rates may not hit spending as hard as the RBA hopes, at least not straight away.

Dr Gianni La Cava from the e61 Institute said research using bank data showed many mortgage holders barely changed their spending during the last major tightening cycle.

“When the RBA hiked rates by 4.25 percentage points over 2022 and 2023, people with variable mortgages barely changed their spending habits despite payments rising by $14,000 a year on average,” he said.

That’s because many households were able to dip into offset and redraw accounts.

“In late 2025 households still had significant buffers, with 40 per cent of mortgage holders holding enough savings to make minimum payments for two years.”

La Cava said this means the latest hike may have a “limited impact on spending through the cash flow channel”, with other levers like the exchange rate and housing prices likely to matter more.

What about business confidence?

For hospitality operators on the ground, confidence, not just cash,  is the biggest concern.

Ross Kemp and Joe Avers, owners of Super Nash Brothers, said they usually see a dip in spending after rate announcements.

“The bigger issue is confidence,” they said. “Costs keep rising and it continues to erode already slim margins.”

“Consumers will still come out and spend, but every increase makes it harder for hospitality businesses to stay profitable.”

They warned that many operators are cutting back or closing, not because their businesses aren’t viable, but because costs have stacked up year after year.

“Only about 0.5 per cent of our industry peers say they are thriving,” they said.

Don’t rule out further rate rises

Many economists believe this won’t be a one-and-done move.

CreditorWatch Chief Economist Ivan Colhoun said the RBA’s language suggests another hike could be coming as early as May.

“When the Board tightens, the Statement always sounds hawkish as they are required to justify their actions,” he said.

“But one-off monetary policy moves are rare.”

Colhoun said inflation appears to have settled above earlier lows rather than re-accelerating sharply, suggesting a “modest re-tightening cycle” — unless global or domestic pressures intensify.

Monash University economist Dr Isaac Gross was more direct.

“Underlying inflation has averaged almost 4 per cent over the past six months, well above the RBA’s target,” he said.

“The next quarterly figures come out in May, which will tell the RBA how serious the inflation uptick is, and Australian households should expect more interest rate hikes over the rest of 2026 if inflation stays strong.”

So what should business owners do now?

While no one’s pretending this is good news, experts agree that preparation matters more than prediction.

Xero economist Louise Southall urged small business owners to double down on cash-flow management.

“Managing your cash flow is always critical and it’s also important to ensure you’re forecasting well ahead as best you can,” she said.

She pointed to tools like automatic invoice reminders, ‘pay now’ buttons and offering multiple payment options as practical ways to reduce cash-flow risk.

While many business owners may take today’s rise as a backwards step, it’s important to get on the front foot. If the pundits are right, the rising rate cycle isn’t done yet so it’s time to prepare.

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