In December 2025, Australian business confidence rose to its highest level in months. The NAB Monthly Business Survey recorded a confidence reading of +3, business conditions strengthened to +9, and sales hit +16. Capacity utilisation sat at 83.2 per cent, well above the long-run average. By most measures, Australian businesses entered 2026 feeling better about their prospects than they had in over a year.
Five weeks later, the Reserve Bank of Australia raised the cash rate to 3.85 per cent. It was the first rate hike in more than two years. The decision was unanimous.
Governor Michele Bullock was direct: "We cannot allow inflation to get away from us again."
The RBA's February 2026 Statement on Monetary Policy described an economy that is "further from balance than assessed last year," with private demand growth "much stronger than expected" and inflation "materially higher" than forecast. The central bank's projections assume the cash rate will reach 3.9 per cent by June and 4.2 per cent by December 2026.
This is not a minor adjustment. It represents a fundamental disagreement between how businesses experience the economy and how the central bank assesses it. Understanding that gap is essential for any business owner making decisions about hiring, investment, or expansion in 2026.
The NAB Monthly Business Survey is one of the most widely followed indicators of business conditions in Australia. It surveys over 900 businesses in the non-farm sector monthly and produces seasonally adjusted readings on confidence, conditions, sales, employment, and profitability.
The December 2025 results were broadly positive across nearly every measure.
Business confidence came in at +3, recovering from a dip to +1 in November after peaking at +6 in October. The trend through the final quarter of 2025 was upward, with businesses reporting stronger demand and improved trading conditions.
Business conditions rose to +9, up from +7 in November. This was driven primarily by sales, which jumped to +16 from +13, and profits, which improved from +4. Employment held steady at +4, indicating stable but not accelerating hiring intentions.
Capacity utilisation eased slightly to 83.2 per cent from 83.6 per cent in November, but remained roughly two percentage points above the long-run average. NAB Chief Economist Sally Auld noted that elevated utilisation was "broad-based," meaning it was not concentrated in a few sectors but spread across the economy.
Price measures ticked higher in the December quarter, with purchase cost growth running at 1.3 per cent and retail prices climbing 0.8 per cent in quarterly equivalent terms.
The Australian Industry Group Leaders Survey from January 2026 told a consistent story. Conditions improved to a net balance of negative 2, up significantly from negative 14 in the prior period. Revenue expectations were positive at +22, and employment intentions sat at +15. Technology investment intentions were strongly positive at +34.
The RBA's assessment starts from the same data but reaches a fundamentally different conclusion.
Where businesses see improving demand, the RBA sees excess demand driving inflation. Where businesses see strong sales, the RBA sees capacity constraints that will push prices higher. Where businesses see stable employment, the RBA sees a labour market that remains "a little tight."
The February Statement on Monetary Policy laid out the case in detail.
Inflation in the December quarter 2025 came in "materially higher" than the RBA's November forecast. The central bank now projects underlying inflation to peak at 3.7 per cent and headline inflation at 4.2 per cent around mid-2026, well above the 2 to 3 per cent target range.
Private demand growth in the second half of 2025 was "much stronger than expected." GDP growth is now forecast to run above potential through most of 2026, which in the RBA's framework means the economy is producing more than it can sustain without generating inflationary pressure.
The RBA's projections are built on an assumption that the cash rate will rise further. The forecasts use an assumed path of 3.9 per cent by mid-2026 and 4.2 per cent by the end of the year. Market pricing since the February meeting suggests participants expect roughly three additional rate rises through 2026. These projections are current as of the February 2026 Statement and will be revised at the RBA's May 2026 meeting.
Total credit growth has "picked up sharply" and is above its long-run average. Business investment forecasts were revised sharply higher, partly driven by data centre construction. The ratio of business debt to GDP has continued to increase.
The RBA's conclusion was stark: the economy seems "further from balance" than previously thought, capacity pressures have been "greater than anticipated," and the assumed path of higher rates is necessary to "restore balance between aggregate demand and potential supply."
Business confidence surveys measure how conditions feel to operators on the ground. Central bank assessments measure whether those conditions are sustainable.
Both can be correct at the same time. Business conditions genuinely did improve in late 2025. Sales were up, profits recovered, and demand strengthened. But the RBA's concern is that this improvement is being driven by demand growth that exceeds the economy's capacity to supply it, which creates inflation, which requires higher interest rates, which will eventually slow everything down.
For SME owners, this creates a specific planning challenge. The signals from daily operations say "things are getting better." The signals from monetary policy say "borrowing is about to get more expensive, and conditions will tighten."
IBISWorld's assessment sits somewhere in between. They forecast business confidence to average 96.2 index points for 2025-26 (where 100 represents neutral), noting that "persistent inflation, elevated interest rates and the ongoing global and domestic economic uncertainty are expected to continue weighing on business confidence throughout the year."
The MYOB Bi-Annual Business Monitor from November 2025 captured this tension at the individual business level. While 24 per cent of SMEs expected economic improvement, 42 per cent expected decline. Metro-based businesses were more optimistic (26 per cent expecting improvement) compared to rural businesses, where 66 per cent expected decline. Younger business owners were notably more positive, with 37 per cent of those aged 18 to 30 expecting improvement.
It is worth pausing on the global context, because Australia's rate hike stands out internationally.
While the RBA raised rates in February 2026, central banks in the euro area, New Zealand, Canada, and Sweden had already paused or finished easing. The United States was expected to cut rates. Australia went in the opposite direction.
The RBA's Statement noted that "market participants expect policy rates to rise or remain unchanged over 2026 in most other advanced economies, although the US policy rate is expected to decline."
For Australian businesses that operate internationally or compete with imported goods and services, this divergence has real implications. A higher cash rate relative to other economies tends to strengthen the Australian dollar, which the RBA acknowledged is "helpful at the margin" for containing inflation but creates headwinds for exporters and import-competing businesses.
The data points to several specific decisions that SME owners need to consider carefully.
The NAB employment index at +4 suggests steady hiring intentions, but the RBA's forecast of rising unemployment (gradually to 4.6 per cent by mid-2028) implies that labour market conditions will ease. For businesses considering adding staff, the near-term window may actually be favourable. Hiring while demand is strong and before conditions tighten is a reasonable strategy, provided the cost base can be sustained if revenue softens later in the year.
Any business considering debt, whether for expansion, equipment, or working capital, needs to stress-test against a cash rate of 4.2 per cent rather than the current 3.85 per cent. The RBA's forecasts are built on that assumption, and market pricing supports it. This is not a worst case. It is the central bank's central scenario.
For businesses already carrying variable-rate debt, the cost of servicing that debt will increase. Financial forecasting that accounts for multiple rate scenarios becomes critical. This is one of the areas where having finance team capability, whether internal or through an embedded model like Scale Suite, directly affects decision quality.
The AI Group data shows technology investment intentions at +34 (strongly positive) while capital expenditure intentions sat at zero. Businesses are investing in productivity, not in physical expansion. That pattern is consistent with the macro environment: demand is strong now, but the cost of capital is rising and the RBA is explicitly trying to slow things down.
The implication is that investments with short payback periods and clear efficiency gains are lower risk than large capital commitments with longer return horizons.
The combination of rising rates, strong near-term demand, and an uncertain trajectory beyond mid-2026 argues for maintaining higher cash buffers than might seem necessary based on current trading conditions. The businesses that navigated previous tightening cycles successfully were typically those that built reserves during the good quarters and had the flexibility to ride out softer periods without forced cost-cutting.
The NAB survey and the RBA's forecasts are not telling contradictory stories. They are telling the same story from different time horizons.
Conditions today are genuinely improved. Sales are strong, profits are recovering, and businesses are more confident than they have been in months. That is real and business owners are right to feel it.
But the conditions driving that improvement are the same ones prompting the RBA to raise rates. Strong demand, capacity constraints, and rising prices are symptoms of an economy running above its sustainable speed. The RBA's response is to apply the brakes, and the effects of that braking will flow through to businesses over the course of 2026.
The businesses best positioned for this environment are those with clear financial visibility, disciplined cost management, and the flexibility to adjust quickly as conditions evolve. Strategic planning that incorporates both the upside of current conditions and the downside of tighter policy is not pessimism. It is preparation.
The RBA raised the cash rate to 3.85 per cent at its February 2026 meeting, up from 3.60 per cent. This was the first rate hike in more than two years. The RBA's forecasts assume the rate will reach 3.9 per cent by June 2026 and 4.2 per cent by December 2026. Market pricing suggests roughly three additional rate rises through 2026. The next RBA Statement on Monetary Policy is due in May 2026.
The RBA raised rates because the economic data showed stronger-than-expected demand growth, higher-than-forecast inflation, and capacity constraints that were greater than previously assessed. In the RBA's framework, the improving conditions that businesses are experiencing are partly driving the inflation problem. The rate hike is intended to slow demand growth and bring it back in line with the economy's capacity to supply goods and services without generating price pressures.
The December 2025 NAB Monthly Business Survey showed confidence at +3, business conditions at +9, sales at +16, and employment steady at +4. Capacity utilisation was 83.2 per cent, approximately two percentage points above the long-run average. Price measures ticked higher during the quarter.
The data supports selective expansion rather than broad-based growth. Near-term demand conditions are strong, and hiring while the labour market is still accessible can be advantageous. However, any expansion involving debt should be stress-tested against a cash rate of 4.2 per cent. Technology and productivity investments with short payback periods carry lower risk than large capital commitments with longer return horizons.
Australia is an outlier. While the RBA raised rates in February 2026, central banks in the euro area, New Zealand, Canada, and Sweden had paused or finished easing. The United States was expected to cut rates. Australia is the only major advanced economy moving to tighten monetary policy in early 2026.
The RBA's February 2026 Statement on Monetary Policy projects underlying inflation to peak at 3.7 per cent and headline inflation at 4.2 per cent around mid-2026. Both are well above the 2 to 3 per cent target range. Inflation is expected to moderate in the second half of 2026 and into 2027 as higher interest rates slow demand, with underlying inflation projected to reach "a little above the midpoint" of the target range by mid-2028.
Scale Suite provides embedded finance services for Australian businesses navigating exactly this kind of environment. Our team delivers cash flow forecasting, scenario modelling, and management reporting through shared platforms, giving business owners the financial visibility to make informed decisions on hiring, borrowing, and investment timing. We work as part of your team, not as an external advisor who checks in quarterly.
We review and update articles periodically. At time of writing, all data and sources were current and accurate. RBA rate forecasts are based on the February 2026 Statement on Monetary Policy; the next update is due May 2026. Figures are based on publicly available datasets and should not be taken as financial advice.
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