Christopher Kent: Restrictive financial conditions in Australia

Speech by Mr Christopher Kent, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, at the Australian Banking Association (ABA) Conference, Melbourne, 26 June 2024. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

I thank the Australian Banking Association (ABA) for inviting me to this conference.

On the occasion of the ABA's 70th anniversary, it would be tempting to look back over the history of banking in Australia. Instead, I will focus on current financial conditions, which is of interest to those in the banking industry and indeed to Australians more generally.

The tightening in monetary policy over the past two years is underpinning restrictive financial conditions in Australia. This is contributing to slower growth of aggregate demand, thereby helping to bring the level of demand into better balance with supply and lower inflation. While recent economic data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation. Hence, with regards to the path of interest rates, the Reserve Bank Board is not ruling anything in or out.

Financial conditions are particularly restrictive for households, but less so for larger businesses. Higher interest rates work through several channels and their effects will vary across different households and businesses according to their circumstances, including their indebtedness and the shape of their balance sheets more broadly.

Monetary policy is restrictive

Monetary policy is the key determinant of financial conditions for households and businesses. Since May 2022, the RBA has raised the cash rate target by 425 basis points. We know that many are feeling a painful squeeze on their finances because of higher interest rates. High inflation, though, has also reduced people's purchasing power. It has adversely affected all households, but especially those on lower incomes.