In a speech on reassessing Australian financial conditions, Reserve Bank of Australia Assistant Governor (Financial Markets) Christopher Kent set out how the Monetary Policy Board judges whether policy is restrictive or accommodative and why it tightened in February and March. He attributed those decisions in part to a reassessment that financial conditions in the second half of 2025 were less restrictive than previously thought, based on updated neutral interest rate estimates and indicators such as strong credit growth and low risk premia. Kent distinguished between long-run and short-run concepts of the nominal neutral cash rate and described how the Bank uses market pricing and multiple models to infer them, noting considerable uncertainty and scope for revision. He pointed to the upward shift in overnight indexed swap pricing in late 2025 and early 2026 as consistent with a rise in perceptions of the short-run neutral rate, and noted that model estimates most likely to capture short-run neutral had increased by around 20 to 30 basis points over recent quarters. On direct measures, he said the Australian dollar’s recent appreciation had contributed to tighter conditions but appeared consistent with historical relationships rather than an additional tightening impulse; lending spreads have narrowed over the past five years, with outstanding variable mortgage rates around 1 percentage point lower relative to the cash rate; credit growth since 2023 has been well above its longer-run average; and a range of financial conditions indices suggest conditions moved from restrictive after the 2022 tightening to slightly accommodative in 2025 and are currently within the range of neutral. On the conflict in the Middle East, he noted that the associated commodity supply shock and increased uncertainty have tightened financial conditions, which would lower short-run neutral rates all else equal, but that inflation and inflation-expectations risks could instead push neutral higher and require a more restrictive stance. He also noted that financial market participants have revised up expected policy rates in Australia and most advanced economies since the start of the conflict.
Reserve Bank of Australia 2026-03-26
Reserve Bank of Australia links February and March cash rate rises to higher neutral rate estimates and less restrictive late-2025 financial conditions
Reserve Bank of Australia Assistant Governor Christopher Kent discussed the Monetary Policy Board's assessment of financial conditions, highlighting recent policy tightening due to less restrictive conditions than estimated. He noted an upward shift in short-run neutral rate perceptions and the impact of the Middle East conflict on financial conditions and policy rate expectations. Kent also addressed the Australian dollar's appreciation and credit growth trends, indicating a shift from restrictive to slightly accommodative conditions.