EY Australian Financial Conditions Index: March 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 higher risk aversion increases the index (and so it has a more positive index value) indicating financial conditions are more restrictive. Expansionary conditions (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, others 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 March 2026 quarter compared to the December 2025 quarter, remaining in restrictive territory for the second consecutive quarter. This was mainly driven by the Reserve Bank increasing the cash rate in both February and March.

Underlying inflation has continued to increase, rising by 3.4 per cent in annual terms in the December quarter. The monthly CPI release indicates that headline inflation has been above the Reserve Bank’s target band for eight consecutive months. The Reserve Bank is concerned about inflation remaining above target for longer than previously expected, with the inflation outlook assessment complicated by the uncertainty surrounding the impact of the Middle East conflict and subsequent impact on domestic economic activity.

Australian bond yields increased sharply in the March quarter, mainly reflecting re-pricing of Reserve Bank cash rate expectations. Financial market pricing for US interest rates shifted higher as the economic outlook improved, with upside risks to inflation while downside risks to employment growth lessened.

Consumers’ perception of their household finances over the last 12 months decreased slightly in the March quarter, reflecting the impacts of higher inflation and interest rates. The outlook for household finances over the next 12 months also worsened, with consumers expecting higher inflation and more rate hikes in coming months.

Total credit growth increased over the March quarter. This reflected a strong increase in mortgage debt, with particularly high growth in lending to investors, which led to continued growth in house prices. However, this was partly offset by weaker growth in business lending.

Commodity prices, in US dollar terms, rose strongly in the March quarter, reflecting increases in the price of gold, coal and LNG. The rise in the gold price was driven by investor concerns about holding risk assets, while the energy disruption caused by the Middle East conflict led to a surge in coal and LNG prices. Commodity prices also rose in Australian dollar terms, although the rise was partly offset by the Australian dollar’s appreciation over the March quarter.

The March quarter Financial Conditions Index only captured the first four weeks of the Middle East conflict and subsequent rise in oil prices, which led to uncertainty and market volatility. Markets are pricing a high probability that interest rates will be increased in May with further rises to follow. Approximately 55 basis points of hikes are expected over the remainder of the year.