EY Australian Financial Conditions Index: June 2026

Understanding financial conditions, beyond just interest rates

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

Tight financial conditions mean it is somewhat difficult for businesses to access funding and capital is harder to come by, while consumer demand is often fragile. Expansionary conditions mean it is relatively easy for businesses to access capital for growth or refinancing, and consumers are likely to be more confident.

The index is scaled so that higher borrowing costs, wider spreads and greater risk aversion increase the index, resulting in a more positive index value and indicating that financial conditions are more restrictive. Expansionary conditions, reflected by more negative index values, indicate that the financial system is currently supporting the economy.

The first and most important data point in guiding financial conditions is the cash rate, which the Reserve Bank sets to steer the economy. However, other variables 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 some from the United States (US) to capture the strong influence this economy has on Australia and the world.

Financial conditions remained restrictive

Financial conditions tightened marginally in the June 2026 quarter compared to the March 2026 quarter, remaining in restrictive territory for the third consecutive quarter. This was mainly driven by the Reserve Bank increasing the cash rate in May.

Underlying inflation, as measured by the trimmed mean, rose by 3.6 per cent in May in annual terms, with the six-month annualised growth rate at 3.5 per cent. Inflationary pressures are broad-based and reflect existing capacity pressures in the domestic economy as well as the impact of the Middle East conflict. Despite the prospect of a peace deal in the Middle East, a return to normal supply conditions is likely to take some time. The Reserve Bank is concerned that inflation pressures are proving sticky and inflation risks are ongoing.

Australian bond yields decreased in the June quarter, mainly reflecting repricing of Reserve Bank cash rate expectations. Financial market pricing for US interest rates shifted higher as upside risks to inflation increased, in particular the potential for second round effects from the energy price shock.

Consumers’ perception of their household finances over the last 12 months decreased sharply in the June quarter, reflecting the impacts of the conflict in the Middle East, in particular higher fuel prices, as well as higher inflation and interest rates. The outlook for household finances over the next 12 months also worsened sharply, with consumers expecting higher fuel prices and higher inflation in coming months.

Total credit growth increased over the June quarter, driven by strong growth in business lending. This was partly offset by weaker growth in housing credit, which may reflect the impact of higher interest rates as well as tax changes announced in the Federal Budget.

Commodity prices, in US dollar terms, rose strongly in the June quarter, reflecting increases in the price of coal and LNG due to the energy disruption caused by the Middle East conflict. This was partly offset by decreases in the price of iron ore due to weaker global demand. Commodity prices also rose in Australian dollar terms, although the rise was partly offset by the Australian dollar’s appreciation over the June quarter.

The Reserve Bank continues to monitor ongoing inflation risks closely. The Reserve Bank Monetary Policy Board has stressed that it is willing to increase the cash rate further if required.