Why Interest Rate Rises in Australia.

By now you will have heard the news that the RBA recently raised the official cash rate by 0.25% to 3.85%, this announcement has been quickly followed by the banks – passing on the rate rise in full.

This rise follows three cuts in 2025, which shows how turbulent our economy is to have such a reversal. 

And unfortunately, we expect further rate rises to occur throughout 2026.

The primary reasoning behind the rise is inflation, which picked up materially in the second half of 2025 and is expected to stay above the RBA's 2-3% target for some time.

And what is inflation?  Putting it in very simple terms, it is the increased costs on the products and services you buy.

The reasoning:

- Stronger household spending

- Rising house prices

- A tight labour market

Another major contributor, although denied by the state and federal governments is government overspending. Federal and state budgets have shown persistent deficits, with the 2025-26 federal deficit forecast around $37 billion (about 1.3% of GDP).

For your business, higher rates mean increased borrowing costs on variable loans or lines of credit, potentially squeezing margins, however in my opinion the biggest pressure will be on the pricing you put on your services and products.

In recent years, we have seen business owners increase their pricing to try keep ahead of rising costs – which has essentially created this vicious cycle of rising inflation - so where does it stop?

And this is why the RBA have stepped in, they want to put pressure on people (and hopefully the government) to reduce spending.  Reduced spending means more job losses, it means more competition between businesses – both of which will ultimately lead to either a slowing down of inflation, or even a reduction. 

Business owners - you need to really consider this recent rate rise - on the surface, it means higher borrowing costs, however we suggest you look deeper than this - yes - consider the cashflow impact to your business on this rate raise, but prepare your business for a greater impact than just that.

Business success is no accident, review your strategic and operational plans, as well as budgets with this in mind, and should you need assistance, we are here to assist.