After a year marked by cautious optimism, Australia’s small and medium enterprises (SMEs) are being warned they could be heading into a more challenging phase, with stronger-than-expected economic conditions threatening to reignite inflation.

CEO of leading non-bank lender Banjo Loans, Guy Callaghan (pictured), says a stronger-than-expected economy is now creating conditions that could trigger another cash-rate rise, with the prospect of an early-2026 increase firming and placing fresh pressure on businesses that have only recently begun to stabilise.

Callaghan said the recently released Consumer Price Index data for October shows an economy that is proving more resilient than expected.

“The latest CPI figures show that growth has held up, consumer confidence has lifted and the labour market remains tight. Inflation also ticked higher,” said Callaghan.

All of this points to an economic environment that may force the Reserve Bank to hold firm on monetary policy, which might result in a cash rate lift early next year.

“Inflation has come down significantly, but the most recent numbers show it edging up again. When you add a strong labour market and solid consumer activity, the RBA has likely come to the end of its rate cutting cycle,” Callaghan said.

“The consensus among economists is shifting towards the likelihood of a rise early in the new year.

With how fragile some areas of the economy still are, I don’t expect that to occur in February, but the risk is certainly there.”

Considering SMEs, Callaghan explained that even the smallest rate increase could damage the slight improvement in SME confidence, which has only recently begun to recover.

“A lot of business owners have only just lifted their heads above the parapet.

“Until very recently, with this latest CPI data, there was an increase in consumer confidence as talk of further rate cuts continued. However, as the discussion has now changed to concern about the possible rate rises, the slight rise in confidence SMEs built up over the past year could disappear overnight. It will affect business expansion plans, investment in growth and the appetite for borrowing.

“There are industries like transport and logistics businesses, who are already hurting. If borrowing costs rise again, these sectors will feel it first. That will then restrict the movement of goods across the economy, placing additional pressure on supply chains.”

Callaghan added that current interest rate environment may simply reflect a new normal.

“It appears we are heading to a world where money is no longer as cheap as it was for the past decade.”

Regardless of the RBA’s decision in its December meeting, Callaghan expects 2026 to look much like 2025.

“There will be pockets of optimism and stretches of pessimism. SMEs will remain cautious. The golden period of easy growth is behind us for now. If we do see rate rises, I expect them to be small and measured to avoid shocking the economy.”

Callaghan said that preparation, consistency and disciplined planning will be essential for businesses navigating the next few years.

“Consistency will be key. This is not the time for major shocks. Hang onto staff, stay focused on your core projects and maintain a steady pipeline of work. That stability will give you resilience.”

When it comes to budgeting and borrowing, he believes SMEs already have the right instincts.

“SMEs are fundamentally optimistic people, but with talks of a rate hike, they are also being cautious, and that is a healthy balance right now. My advice to SMEs in 2026 is to continue to plan carefully, structure your finances well and hit your financial milestones before you commit to the next step of expenditure.”

The Banjo Loans CEO also encouraged the RBA to consider the uneven conditions for SMEs across the country.

“There are pockets of the economy that are doing very well and pockets that are really struggling,” Callaghan said.

“It’s a multi-speed environment. Any decision on rates needs to recognise that diversity. The RBA has been transparent and careful and I expect it will continue to take those differences into account.”