The Reserve Bank kept rates at 3.60% after inflation jumped unexpectedly. What this means for small business borrowing costs and hiring decisions heading into 2026.
What’s happening: The Reserve Bank of Australia has held the cash rate at 3.60 per cent after trimmed mean inflation rose to 3.0 per cent over the year in September, up from 2.7 per cent in June. The increase was materially higher than the RBA expected in August.
Why this matters: Small businesses face an extended wait for borrowing relief, with rate cut expectations now pushed to mid-2026. Labour remains difficult to source, wages growth stays elevated, and productivity remains weak, keeping cost pressures high for SMEs.
The Reserve Bank of Australia has kept the cash rate unchanged at 3.60 per cent, extending the wait for relief on business borrowing costs after inflation proved more persistent than expected.
Trimmed mean inflation rose to 3.0 per cent over the year in the September quarter, up from 2.7 per cent in June. The Monetary Policy Board described the increase as “materially higher than expected” at the time of the August Statement on Monetary Policy.
Inflation pressures remain
The Board acknowledged that underlying inflation has fallen substantially since peaking in 2022, as higher interest rates worked to bring demand and supply closer to balance. However, headline inflation also rose sharply to 3.2 per cent over the year in the September quarter, partly due to the cessation of electricity rebates in several states.
“The Board’s judgement is that some of the increase in underlying inflation in the September quarter was due to temporary factors,” the statement read. The central forecast, based on a technical assumption of one more rate cut in 2026, has underlying inflation rising above 3 per cent in coming quarters before settling at 2.6 per cent in 2027.
Just over two weeks ago, markets were pricing in a nearly 80 per cent chance of a cash rate cut, according to Oliver Hume Chief Economist Matt Bell. “This was back below 50% before the inflation data and cratered to essentially zero after it,” Bell said.
Markets currently expect just one more rate cut by mid-2026, with a 50 per cent chance of it arriving by March. Bell suggested May 2026 as a more likely timing, noting the RBA probably needs a few quarters of favourable inflation data before cutting again.
Labour costs stay elevated
The rate hold comes as small businesses continue to face tight labour market conditions. Business surveys and liaison indicate a significant share of firms are still experiencing difficulty sourcing labour, despite some recent easing in conditions.
“Various indicators suggest that labour market conditions remain a little tight, notwithstanding a recent easing,” the Board stated. The unemployment rate rose to 4.5 per cent in September from 4.3 per cent in August, and employment growth has slowed slightly more than expected.
However, measures of labour underutilisation remain at low rates and job vacancies are still at elevated levels. Wages growth has eased from its peak, but productivity growth has been weak and growth in unit labour costs remains high, the Board noted.
These conditions create ongoing pressure for small businesses managing payroll expenses whilst trying to maintain competitiveness.
Business credit accessible
Despite the rate hold, the RBA confirmed that credit remains readily available to both households and businesses. Financial conditions have eased since the beginning of the year, though it will take time to see the full effects of earlier cash rate reductions.
Data on consumption suggest the pick-up in private demand evident in the June quarter is ongoing. “If the pick-up in private demand continues to exceed expectations, this could increase the demand for labour, add to capacity pressures and make it easier for businesses to pass on cost increases,” the Board stated.
Bell noted that households and consumers are spending more, which is “ironically, one of the reasons why inflation remains persistent and fewer rate cuts are likely.”
For SMEs, this presents a mixed picture. Stronger consumer demand supports revenue growth, but persistent inflation and elevated borrowing costs constrain expansion plans and margin improvements.
Outlook uncertain
The Board acknowledged heightened uncertainty about the outlook stemming from both domestic and international developments. On the domestic side, if private demand continues to exceed expectations, this could increase demand for labour and add to capacity pressures.
Trade policy developments are still expected to have an adverse effect on world growth over time. Beyond tariffs, a broader range of geopolitical risks remain a threat to the global economy. “This could all weigh on growth in aggregate demand and lead to weaker labour market conditions in the domestic economy,” the Board warned.
Additional uncertainties include the assessment that monetary policy remains a little restrictive, the lags in the effect of recent monetary easing, and the balance between aggregate demand and potential supply for goods and services.
“The recent data on inflation suggest that some inflationary pressure may remain in the economy. With private demand recovering and labour market conditions still appearing a little tight, the Board decided that it was appropriate to maintain the cash rate at its current level at this meeting,” the statement read.
The RBA emphasised it will remain attentive to evolving data and the outlook, paying close attention to developments in the global economy, domestic demand trends, and the outlook for inflation and the labour market. The Board remains focused on its mandate to deliver price stability and full employment.
For small businesses, the message is clear: borrowing costs will remain elevated through the end of 2025, with any relief dependent on inflation returning sustainably to target over coming quarters.
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