Sluggish economic growth and the recent decision by the Reserve Bank of Australia to raise interest rates have undercut perceived business conditions in the nation, reported Westpac, one of the "Big Four" banks on the continent, on Tuesday.

The headline Australian business conditions index declined to a positive 7 in January from a positive 9 in December, undercut by softening sales and profitability.

"The latest NAB business survey points to a sluggish start to 2026," said Westpac. "While conditions remain well above the lows seen in early 2025, the January result suggests that the positive momentum that emerged late last year is stalling."

Trading conditions saw the sharpest decline, falling to a positive 10 in January from a positive 16 in January, while profitability fell to positive 5 from a positive 8, reported Westpac.

Capital expenditure also softened in January, falling to positive 9 from a positive 10 in December, although the category remained above the long-run survey series average, noted Westpac.

Last week, the Reserve Bank of Australia (RBA) raised its policy interest rate to 3.85% from 3.60%, citing inflation above target, and capacity constraints in the domestic economy, including tight labor markets.

Australia's consumer price index logged a gain of 3.8% on year in December, above the RBA's 2% to 3% inflation-target band, unsettling the nation's central bank.

Although Australian enterprise conditions sagged in January, business confidence improved, rising to a positive 3 from a positive 2 in December, although confidence was still "below its long‑run average," added Westpac.