RETAIL RECOVERY AT RISK AS RBA RAISES CASH RATE TO 3.85 PER CENT

The Reserve Bank of Australia (RBA) has lifted the cash rate by 25 basis points to 3.85 per cent, citing renewed inflationary pressures driven by stronger-than-expected private demand, tightening capacity constraints and resilient labour market conditions.

In a statement, the RBA said inflation had “picked up materially” in the second half of 2025 and was now expected to remain above target for some time.

Household spending, business investment and housing market activity have all strengthened, while credit conditions remain accommodative and earlier rate cuts are yet to fully flow through the economy.

The central bank said the decision to tighten policy further was unanimous and reiterated it would remain “attentive to the data” amid ongoing uncertainty around domestic demand, global conditions and the restrictiveness of monetary policy.

Rate hike to impact household spending

Retail and small business groups warned the move would further weigh on consumer confidence and already pressured household budgets.

Chris Rodwell, CEO of the Australian Retail Council (ARC), said the rate rise would slow the sector’s recovery after several years of cost pressures.

“This rate rise places additional pressure on business investment and household budgets,” he said, adding that retailers had spent the past three years managing rising costs, global competition and ongoing uncertainty.

Rodwell said the decision highlighted the need to lift productivity across the economy, calling on governments to reduce regulatory duplication and compliance costs and to contain spending.

Consumer finance expert Joel Gibson from Zyft said the impact on households would be immediate, particularly for mortgage holders and renters.

“For the 35 to 40 per cent of Australians with a mortgage, we’re talking an extra $115 a month on the average $694,000 loan,” he said, noting that more than half of mortgage holders were already experiencing mortgage stress before the decision.

Gibson said renters were also likely to feel the effects as higher costs were passed on.

“Everyday essentials like groceries, energy and insurance are taking a bigger bite out of household budgets,” he said, adding that Australians are now spending about $198 a week on groceries, or more than $10,300 a year.

Small business sentiment also remains fragile, according to Xero economist Louise Southall, who said many owners had been hoping for a longer pause in rates.

“Today’s decision puts at risk the emerging recovery in small business sales and means owners must once again deal with the negative flow-on effects of higher interest rates on customer budgets, confidence and spending,” she said.

Southall pointed to Xero data showing small business sales grew 5.5 per cent year-on-year in the September quarter, the strongest result in two years but still below the historical average.

She said cash-flow management would be critical for businesses navigating the latest increase.

Hospitality operators said the decision would further strain an industry already operating on thin margins.

Ross Kemp and Joe Avers, owners of Super Nash Brothers, said confidence remained the biggest challenge.

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

They warned that rising operating costs and limited pricing power were forcing many operators to scale back or close, despite otherwise viable businesses.

Grant Austin, CEO of pay.com.au, said the rate hike effectively erased the relief many small and medium-sized enterprises experienced during last year’s pause cycle.

“For many Aussie SMEs, that brief dip to 3.60 per cent was a lifeline.

Now, that buffer is gone,” he said.

Austin pointed to rising insolvencies, particularly in hospitality, citing CreditorWatch data showing nearly 11 per cent of cafes and restaurants closed in the past year.

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

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