In a fireside chat at Commonwealth Bank’s Global Markets Conference, Reserve Bank of Australia Assistant Governor for Financial Markets Christopher Kent assessed overall financial conditions as somewhat restrictive but mixed. The cash rate and its expected path over the next 18 months sit at the upper end of the range of highly uncertain neutral-rate estimates, leaving the Monetary Policy Board to determine whether the degree of restraint is sufficient amid adverse supply shocks, weak productivity and a softening labor market. Monetary policy is transmitting broadly as expected through the exchange rate, housing and wealth effects, incentives to save, and household cash flows, although Kent characterized the process as still being in its early stages. Housing credit, prices, turnover, dwelling investment and household consumption have weakened, while strong business credit and relatively narrow credit spreads and equity risk premiums point to less restrictive conditions elsewhere. Some indicators suggest the labor market has loosened faster than forecast, with unemployment at 4.7%, but Kent cautioned against placing too much weight on monthly data and said the forthcoming third-quarter inflation data would help clarify the balance between weaker demand and continuing cost pressures. Kent also explained that the RBA’s new term repo facility will use small, price-based longer-term auctions in normal conditions, complementing its full-allotment seven-day and 28-day operations. The longer-term auctions are intended to maintain operational familiarity and could be scaled up during market stress without unduly displacing private funding markets.

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