EY Australian Financial Conditions Index: March 2024

The EY Australian Financial Conditions Index eased in the March quarter of 2024; however, conditions remain restrictive.

In brief:

• The EY Australian Financial Conditions Index illustrates the state of financial conditions in Australia for businesses that wish to assess the macro investment environment.
• The EY Australian Financial Conditions Index shows less restrictive conditions in the March quarter 2024 than in the December quarter 2023. The cash rate remained steady in the March quarter.
• The index illustrates the importance of examining a broader range of variables than just the cash rate to fully understand conditions impacting Australian business.

Understanding financial conditions beyond just interest rates

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

Tight financial conditions mean it is difficult for businesses to access funding and liquidity is hard to come by, while expansionary conditions mean it is 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.

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 surveyed measures of consumers’ views on their household finances. We focus mainly on Australian variables, but also include variables from the United States to capture the strong influence this economy has on Australia’s economy.

Financial conditions remain restrictive

Financial conditions eased in the March quarter of 2024 compared to the December quarter of 2023, but remain in restrictive territory given the cash rate has remained steady. This follows the Reserve Bank’s thirteenth interest rate rise in November 2023. Financial markets had priced the end of the current hiking cycle, given inflation had continued to moderate and were looking forward to interest rate cuts at the end of 2024. There was also a slight decrease in bond yields.

Consumers’ perception of their household finances over the next 12 months improved, although it remained poor.

Conditions were still restrictive, though, as total credit growth, especially to the household sector was subdued. The money base continued to fall, as the Reserve Bank’s quantitative easing was slowly unwound.

The Reserve Bank continues to monitor ongoing inflation risks. As the Governor has warned, interest rates could remain around current levels or even increase if both domestic and international inflationary pressures remain high or fluctuate in 2024.

Financial conditions are likely to remain restrictive through 2024.