The Reserve Bank of Australia (RBA) has raised the official cash rate by 0.25 percentage points to 3.85%, marking the first rate increase in more than two years and sending disappointment through the hospitality sector.
The move comes as inflation remains stubbornly elevated, with industry groups warning the decision will squeeze restaurants and cafés from both sides—increasing business costs while dampening consumer spending.
A significant threat on razor-thin margins
Wes Lambert, CEO of the Australian Restaurant & Café Association (ARCA), said the rate rise represents a significant threat to operators working on razor-thin margins.
“For restaurants and cafés operating on margins below 3%, a quarter-point rate rise is not marginal—it’s material,” Lambert said. “Higher interest rates immediately lift borrowing and working-capital costs, squeeze cashflow and reduce the capacity of small businesses to invest, hire or even absorb existing cost pressures.”
ARCA warned that hospitality businesses face unique exposure to rate increases due to their reliance on discretionary consumer spending. As households adjust to higher mortgage and credit repayments, dining out is typically among the first expenses to be cut.
“When interest rates rise, people don’t stop eating—but they do eat out less often, spend less per visit and cut back mid-week,” Lambert said. “Hospitality is one of the first sectors to feel that pullback, and it comes on top of already elevated labour, energy, rent and input costs.”
Any business relief has been ‘wiped out’
Grant Austin, CEO of pay.com.au, an Australian fintech helping SMEs manage payments, said the rate increase effectively erases the relief businesses received during 2025’s pause period.
“The RBA’s hike today effectively wipes out the gains from 2025’s run of pauses. For many Aussie SMEs, that brief dip to 3.60% was a lifeline that allowed them to keep staff on board and prices competitive. Now, that buffer is gone,” Austin said. “This is a blow to the survival of the Australian engine room—SMEs. We are seeing businesses that were keeping the wheels turning suddenly stall, as the cost of commercial facilities and loans grind their momentum to a halt.”
Austin pointed to alarming insolvency data that underscores the hospitality sector’s vulnerability, citing CreditorWatch figures showing nearly 11% of cafes and restaurants closed their doors over the last year—a rate nearly double the national average.
“In an industry where margins were already razor-thin, this hike is a dangerous catalyst for more collapses,” he said. “Between this move and the proposed surcharging ban in July, SMEs are being suffocated by rising overheads and a lack of liquid cash. When you layer an increased 4.10% sticky services inflation on top of rising debt-servicing costs, every dollar sitting idle in a bank account becomes risky.”
The association expressed particular concern about the potential for further rate increases if inflation remains close to 4% throughout 2026.
“A sustained higher-rate environment combined with sticky inflation is a real danger zone for hospitality,” Lambert said. “It tightens margins from both ends—costs keep rising while demand softens—and that’s when otherwise viable businesses are pushed into distress.”
Bracing for ripple effects across hospo
Beyond immediate cost pressures, ARCA highlighted broader ripple effects across the sector, including delayed refurbishments, postponed expansion plans and reduced hiring as operators adopt a more conservative stance. “Suppliers face higher financing costs too, which inevitably flow through the supply chain. The result is a slowdown in investment, productivity and job creation in one of Australia’s largest employing industries,” said Lambert.
Gavan Ord, Business and Investment Lead at CPA Australia, said the decision would disappoint borrowers who had hoped the worst of the rate cycle was over, particularly those coming off fixed-rate loans.
“Small businesses remain under pressure from high borrowing costs, rising inflation and low consumer confidence,” Ord said. “For many, there are no easy options left.”
He warned that many small businesses would be forced to pass costs on to customers, while others would need to scale back investment and growth plans to manage cash flow.
Smart cash management is the shock absorber
Austin said survival in the current environment requires a fundamental shift in how hospitality operators manage their finances.
“Survival now means prioritising operational agility over volume. For the hospitality sector, this starts with identifying hidden cash drains through regular utility audits and moving to demand-driven rostering,” he said. “By building a proactive liquidity buffer, savvy owners can turn mandatory expenses—like surging power bills, rent, and BAS—into a strategic rewards loop rather than sunk costs. When the engine of our economy is under pressure, smart cash management becomes the ultimate shock absorber.”
Both organisations called for government action to ease the burden on struggling businesses. ARCA urged policymakers to avoid adding new cost pressures through taxation, regulation or training levies, while CPA Australia advocated for reducing red tape and improving the business environment.
“What small businesses need most is decisive government action to reduce red tape and improve the overall business environment,” Ord said. “Removing unnecessary regulatory burden helps businesses focus on growing, employing people and serving customers.”
Lambert emphasised the need for coordinated policy settings that recognise hospitality’s sensitivity to interest rate movements.
“If inflation remains high and rates continue to rise, governments need to avoid layering on additional cost burdens,” he said. “Hospitality needs relief, productivity support and workforce reform—not more pressure.”
The rate increase marks a reversal from recent monetary policy direction and signals the RBA’s ongoing battle with persistent inflation, setting up a challenging environment for Australia’s restaurant and café sector as it navigates 2026.
