EY Australian Financial Conditions Index: September 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 expansionary territory

Financial conditions loosened in the September 2025 quarter compared to the June 2025 quarter, entering expansionary territory after one quarter of restrictive conditions. This occurred as the cash rate was lowered by 25bps by the Reserve Bank of Australia in August 2025, the third such easing of this cycle.

The improvement in consumers’ views of household finances was the main driver of the EY Financial Conditions Index moving into expansionary territory in the September quarter 2025. Consumers’ perception of their household finances over the last 12 months significantly improved in the September quarter. This was due to the lower interest rate environment along with the continued increase in equity markets, following the large decline in April due to concerns over US tariffs (which impacted the average reading for the June quarter). The outlook for household finances over the next 12 months improved, reflecting greater optimism around the future of interest rates.

Australian bond yields increased slightly in the September quarter, compared to the June quarter, mainly reflecting the re-pricing of Reserve Bank cash rate expectations. Higher than expected inflation in the August monthly CPI release led markets to expect less cuts to the cash rate over the next year than was previously forecast. In contrast, longer term US bond yields were lower in September compared to June due to re-pricing of the Federal Funds rate expectations. Financial market pricing for US interest rates shifted lower over the quarter due to weaker than expected employment data.

Total credit growth recorded a strong increase over the September quarter. This was driven by a solid increase in mortgage debt, with particularly high growth in lending to investors, which led to strong growth in house prices. In addition, continued growth in business lending also contributed to the rise.

Commodity prices, in US dollar terms, rose in the September quarter, mainly due to an increase in iron ore prices. This reflected robust demand from China for iron ore, with improved sentiment in the steel market, despite ongoing weakness in China’s property sector. Commodity prices also rose in Australian dollar terms, although the rise was partly offset by the Australian dollar’s appreciation over the September quarter.

While there has been more clarity on the United States trade policy and responses from other countries, global financial conditions remains highly uncertain. The United States trade policy uncertainty index continues to be elevated at over five times its long run average. So far, the impact of global trade developments has had a minimal impact on Australia, although there remains the possibility for changing policy positions which could impact global growth and supply chains. We recently published a trade research article on the impacts of the trade war for Australia, which outlined how Australia may benefit moderately in the long-term.

Headline inflation accelerated in the September quarter, rising by 3.2 per cent in annual terms, which is above the target band. This was mainly due to the rise in electricity prices as government rebates were used up. Underlying inflation, as measured by the trimmed mean, rose by 3.0 per cent over the twelve months to the September quarter. This was higher than the 2.7 per cent increase in the June quarter and was also stronger than the Reserve Bank expectations in the August Statement on Monetary Policy.

The Reserve Bank was very uncomfortable with the re-acceleration in inflation in the September quarterly CPI at the same time it continues to assess the labour market as somewhat tight. This means that a further rate cut this year looks less likely. However, the Reserve Bank may well continue the rate-cutting cycle next year. The Governor has stated that the Monetary Policy Board needs to be confident that underlying inflation will continue moderating to the midpoint of the 2 to 3 per cent target band before it can lower rates further.

Markets no longer expect that the Reserve Bank of Australia will lower interest rates by the end of this year. However, a cash rate cut, taking the cash rate to 3.35 per cent, is still possible next year.

Expansionary financial conditions, or conditions close to neutral, will assist in the ongoing recovery in household consumption. However, as we look to be near the end of the current easing cycle given the recent inflation readings, in combination with elevated levels of economic uncertainty, this could mean that the recovery is slower than expected.