Interest rates

The Reserve Bank of Australia has lifted the cash rate from 3.60% to 3.85%.

Announced on 3 February 2026, this shift reflects growing concern around rising inflation, increasing capacity pressure, and a labour market that remains tight. In response, the RBA has acted to cool momentum before these economic conditions become harder to control.

For small business owners, this isn’t just a macroeconomic adjustment, it’s a direct change to the cost of money, the availability of credit, and the way financial decisions will need to be made moving forward.

How an increase in interest rates may affect your business finances

Increased cost of borrowing

Higher interest rates on loans: An increase in the cash rate translates into higher monthly interest payments on your existing variable-rate business loans. It also means less favourable terms on any new lines of credit or equipment financing.

Tighter access to credit: As borrowing costs rise, lenders often tighten their criteria. You may find it more difficult to secure financing for expansion as banks become more cautious about your ability to service debt at higher rates.

Strained cashflow

Increased debt servicing: Higher interest payments eat into your monthly margins. This reduces the amount of free cashflow you have available to reinvest in marketing, maintenance or staff bonuses, etc.

Decreased consumer spending: As the RBA raises rates to combat inflation, households often cut down on their spending to cover their own rising mortgage payments. This can lead to a cooling of demand for your goods and services.

Shift in investment strategy

Higher cost of capital: With more expensive borrowing, the overall costs of new projects may increase. Justifying the expense of these projects becomes harder, so you may need to delay R&D investment or pause upgrades to tech and machinery.

Reduced investor appetite: Higher interest rates can make high-risk business investments less attractive than lower-risk assets, like government bonds. This makes it more challenging to raise capital through equity financing or find new private investors.

Economic cooling

Slowing the economy: The aim of the cash target increase is to dampen economic activity to control inflation. For a small business, this creates a more challenging environment characterised by cautious consumer behavior and higher operating costs.

Focus on efficiency: In a high-rate environment, the focus shifts from ‘growth at all costs’ to ‘resilience and efficiency’. In a tighter economy, being disciplined with your financial management is a vital way to weather the storm.

The Takeaway: A Higher-Rate Economy Demands Sharper Decisions

This rate increase may not be welcome news for businesses heading into 2026. But it does provide clarity: the cost of money is rising, and the environment is tightening.

Businesses that respond early by reviewing finance structures, managing cashflow closely, and maintaining disciplined financial planning are best placed to adapt.

Talk to Us

If you are concerned about rising repayments, tighter lending conditions, or funding your 2026 plans, our team can help you assess your position and navigate the next steps with confidence.