EY Australian Financial Conditions Index: June 2025

Understanding financial conditions beyond just interest rates

Financial conditions are an important contributor to economic growth – and an indicator of business cycle stages and what’s ahead.

Tight financial conditions mean it is somewhat difficult for businesses to access funding and liquidity is harder to come by, while expansionary conditions mean it is relatively easy for businesses to access capital for growth.

Expansionary conditions (a negative index value) indicate that the financial system is currently supporting the economy. If conditions are restrictive (a positive index value), the financial system is constraining the economy, indicating financial downside risks are present.

The first and most important data point in guiding financial conditions is the cash rate, which the Reserve Bank of Australia sets to steer the economy. However, there are many more variables that are also important to consider.

We draw on a broad number of variables including asset prices, interest rate spreads, credit and money growth, debt securities outstanding, financial market risk and consumers’ views on household finances. We focus mainly on Australian variables but also include variables from the United States (US) to capture the strong influence this economy has on Australia and the global economy.

Financial conditions entered restrictive territory

Financial conditions tightened in the June 2025 quarter compared to the March 2025 quarter entering restrictive territory after two consecutive expansionary quarters. This was despite the cash rate being lowered 25bps by the Reserve Bank of Australia in May 2025, the second such easing of this cycle.

Underlying inflation has continued to trend down, with the May monthly CPI release indicating that annual trimmed mean inflation has now been within the Reserve Bank’s target band for six consecutive months. The Reserve Bank kept rates unchanged in July, awaiting the June quarter inflation data to confirm whether quarterly trimmed mean inflation is moving towards the target midpoint.

The deterioration in consumers’ views of household finances was the main driver of the financial conditions index moving into restrictive territory in the June 2025 quarter. Consumers’ perception of their household finances over the last 12 months decreased in the June quarter, reflecting large declines in equity markets in April following trade policy developments triggered by the US administration’s announcement of goods import tariffs. The outlook for household finances over the next 12 months significantly worsened due to concerns over US tariffs, as well as continued uncertainty about the future of interest rates.

Australian bond yields decreased in June, compared to March, mainly reflecting the re-pricing of Reserve Bank cash rate expectations. In contrast, longer-term US bond yields were higher in June compared to March due to an increase in risk premiums. Financial market pricing for US interest rates shifted higher over the quarter following the administration’s announcement of broad tariffs on its goods imports.

Total credit growth increased over the quarter as business lending continued to grow strongly, despite financial conditions moving into restrictive territory. Mortgage debt also rose, leading to strong house price growth.

Commodity prices, in US dollar terms, fell in the June quarter, due to a decrease in iron ore and coal prices. This was driven by concerns about weaker global economic growth following trade policy developments. In addition, the Australian dollar appreciated over the June quarter, which further lowered commodity prices in Australian dollar terms. This was despite a large temporary depreciation in early April, when concerns over trade policy were elevated.

There remains significant uncertainty in global financial conditions, with the US trade policy uncertainty index remaining elevated at over five times its long-run average. While market volatility has decreased from high levels in April, there are ongoing trade negotiations between the US and other nations and frequently changing policy positions. The implications for global growth and supply chains could be quite significant, although they are not yet discernible.

Markets are pricing a high probability (over 90 per cent) that the Reserve Bank of Australia will lower interest rates in August with further reductions to follow. Approximately 63 basis points of cuts are expected over the remainder of the year, which would take the cash rate to 3.22 per cent by December 2025.

The Reserve Bank continues to be alert to inflation risks domestically, particularly due to the tight labour market, high unit labour costs and low productivity growth. At the same time, it has signalled it is closely monitoring overseas trade policy developments and is prepared to act should conditions change.