What happens: The Reserve Bank of Australia has kept cash rates at 3.60 percent after trimmed average inflation rose to 3.0 percent in September, up from 2.7 percent in June. The increase was significantly higher than the RBA expected in August.
Why this is important: Small businesses face a long wait for credit relief as expectations for rate cuts have been pushed back to mid-2026. Labor remains difficult to source, wage growth remains high and productivity remains weak, keeping cost pressures high for SMEs.
The Reserve Bank of Australia has kept its cash rate unchanged at 3.60 percent, extending the wait for relief in borrowing costs for businesses after inflation proved more stubborn than expected.
The truncated average inflation rate rose to 3.0 percent over the year in the September quarter, up from 2.7 percent in June. The Monetary Policy Board described the increase as “materially higher than expected” at the time of its August monetary policy statement.
Inflationary pressures persist
The Council acknowledged that underlying inflation has fallen significantly since its peak in 2022, as higher interest rates brought supply and demand closer together. However, headline inflation also rose sharply to 3.2 percent on the year in the September quarter, partly due to the end of electricity rebates in several states.
“The Board’s assessment is that part of the increase in underlying inflation in the September quarter was due to temporary factors,” the statement said. According to the central forecast, based on the technical assumption of another rate cut in 2026, underlying inflation will rise above 3 percent in the coming quarters before reaching 2.6 percent in 2027.
Just over two weeks ago, markets were pricing in an almost 80 percent chance of a cut in cash rates, according to Oliver Hume’s chief economist Matt Bell. “This was back below 50% before the inflation data and then dropped to virtually zero,” Bell said.
Markets currently expect only one more rate cut by mid-2026, with a 50 percent chance that it will occur in March. Bell suggested May 2026 as a more likely time, noting the RBA would likely need a few quarters of favorable inflation data before cutting again.
Labor costs remain high
The interest rate cut comes as small businesses continue to face tight labor market conditions. Business surveys and contacts show that a significant proportion of companies are still experiencing difficulties in finding workers, despite some recent easing of conditions.
“Several indicators suggest that labor market conditions remain somewhat tight, despite a recent easing,” the Council said. The unemployment rate rose from 4.3 percent in August to 4.5 percent in September, and employment growth has slowed slightly more than expected.
However, labor underutilization metrics remain low and vacancies are still at high levels. Wage growth has slowed from its peak, but productivity growth is weak and unit labor cost growth remains high, the Governing Council said.
These conditions place ongoing pressure on small businesses as they manage labor costs while trying to maintain their competitiveness.
Business credit accessible
Despite the rate cut, the RBA confirmed that credit remains readily available to both households and businesses. Financial conditions have eased since the start of the year, although it will take some time for the full effects of previous cuts in cash rates to be seen.
Consumption data show that the rebound in private demand seen in the June quarter continues. “If the rebound in private demand continues to exceed expectations, it could increase labor demand, increase capacity pressures and make it easier for companies to pass on cost increases,” the Council said.
Bell noted that households and consumers are spending more, which is “ironically one of the reasons why inflation remains persistent and there are likely to be fewer interest rate cuts.”
This produces a mixed picture for SMEs. Stronger consumer demand is supporting sales growth, but persistent inflation and higher financing costs are limiting expansion plans and margin improvements.
Outlook uncertain
The Council recognized the increased uncertainty about the outlook due to both domestic and international developments. On the domestic side, if private demand continues to exceed expectations, labor demand could increase and capacity pressures could increase.
Trade policy developments are still expected to have a negative impact on global growth over time. Beyond tariffs, a broader range of geopolitical risks continue to threaten the global economy. “All of this could weigh on aggregate demand growth and lead to weaker labor market conditions in the domestic economy,” the Council warned.
Additional uncertainties include the assessment that monetary policy remains somewhat restrictive, the lag in the effect of the recent monetary easing, and the balance between aggregate demand and potential supply of goods and services.
“Recent inflation data suggest that some inflationary pressures may remain in the economy. With private demand recovering and labor market conditions still appearing somewhat tight, the Council decided that it was appropriate to keep the cash rate at current levels at this meeting,” the statement said.
The RBA emphasized that it will remain alert to the changing data and outlook, paying close attention to developments in the global economy, domestic demand trends and the outlook for inflation and the labor market. The Council remains focused on its mandate to achieve price stability and full employment.
For small businesses, the message is clear: borrowing costs will remain high until the end of 2025, with any relief dependent on inflation returning sustainably to target in the coming quarters.
Stay up to date with our stories on LinkedIn, Tweet, Facebook And Instagram.
#interest #rate #pause #puts #pressure #growth #plans #SMEs #runup