Statement on Monetary Policy – November 20251. Financial Conditions

1.1 Interest rate markets

Since the August Statement, some central banks have responded to signs of weakening domestic economic outlooks by easing policy rates.

A number of central banks in advanced economies expect inflation to return to target by early 2026, in some cases because subdued growth outlooks and weaker labour markets will contribute to disinflationary pressures. Some have reduced policy rates further despite recent stickiness in inflation. The US Federal Reserve (Fed) reduced its policy rate by a cumulative 50 basis points across its September and October meetings, citing increased downside risks to the labour market but acknowledging that inflation remains above target with risks to the near-term inflation outlook still tilted to the upside. The Reserve Bank of New Zealand (RBNZ) reduced its policy rate by a cumulative 75 basis points across its August and October policy meetings, citing significant spare capacity in the economy, and the Bank of Canada reduced its policy rate by a cumulative 50 basis points across its September and October meetings amid weak domestic activity. Norges Bank and Sweden’s Riksbank also reduced their policy rates by 25 basis points in September.

By contrast, the European Central Bank (ECB) left its policy rate unchanged, highlighting that risks to the outlook appear balanced with inflation in the euro area projected to remain around target. The ECB also noted that the policy rate is close to the centre of its estimates of the nominal neutral rate, and continued geopolitical uncertainty warranted a data-dependent approach. The Bank of England (BoE) also left its policy rate unchanged, highlighting persistent inflationary pressures despite subdued economic growth. The Bank of Japan (BoJ) left its policy rate unchanged and noted a moderation in economic activity in the near term and continued uncertainty around trade policy.

Most advanced economy central banks have continued to reduce the size of their balance sheets either actively or passively (Graph 1.1). However, the Fed has announced that it will end its balance sheet run-off in December because reserves – banks’ deposits at the Fed – are approaching what it judges to be ample levels; this assessment came amid signs in repo markets that liquidity conditions are tightening gradually. In Australia, demand for funding at the RBA’s open market operations and activity in private repo markets suggest that the supply of reserves still exceeds ample levels.

The People’s Bank of China (PBC) still intends to maintain a moderately accommodative policy stance. While the magnitude of policy rate cuts during the current easing phase is comparable to the past, lending to the private sector has not responded as it has in prior easing phases (Graph 1.2). This is despite a significant easing in quantity-based tools such as the reserve requirement ratio, and lending rates being at historical lows. Nevertheless, the PBC has previously noted that the current drivers of economic growth are less credit intensive than in the past, and economic growth in the September quarter was stronger than expected by market participants. Consistent with authorities’ ongoing preference for using fiscal policy to support economic activity, government bond issuance has continued to drive total social financing growth amid recent weakness in investment (see Chapter 2: Economic Conditions). However, a significant share of issuance has also been used to help local governments restructure their debts and to recapitalise banks.

Market participants expect significant monetary easing in the United States over the coming year but only modest further declines in policy rates in some other advanced economies.

Market participants expect the Fed to cut its policy rate by at least 75 basis points by the end of 2026, consistent with the Fed’s assessment that downside risks to the US labour market have increased (Graph 1.3). The RBNZ is expected to cut its policy rates further this year, and the BoE and Norges Bank are expected to cut their policy rates further in 2026. Market participants continue to expect the BoJ to raise its policy rate to make its policy stance less accommodative.

For Australia, the market path for the cash rate has shifted significantly higher since August.

Market participants’ expectations for the cash rate rose in response to a run of stronger-than-expected monthly and quarterly inflation and activity data, and communication from the Board and Governor. These moves were only partially offset by the market’s response to the weaker-than-expected Labour Force Survey for September. The market path is now around 30 basis points higher than at the August Statement, and 10 basis points higher than prior to the September Board meeting.

Market participants are now assigning only a very low probability to a rate cut this year (Graph 1.4). One cut of 25 basis points is still fully priced in by mid-2026, with only a small chance of a further cut beyond that. All market economists tracked by the staff expect that the Board will leave the cash rate target unchanged at the November Board meeting; the minority that had been previously expecting a November cut changed their calls in response to the September quarter CPI release. Indeed, a majority of these market economists now expect no further cuts through 2026, with many explicitly noting that this easing phase may be over. Most market economists retaining cuts in their profiles have indicated that they will reassess their expected path in coming weeks, or that the risks to their path are skewed to the upside.

Government bond yields in advanced economies are being shaped by shifts in central bank policy rate expectations, with longer term structural forces also having an influence for some.

Since the August Statement, shorter and longer term US Government bond yields have declined and longer term yields are now lower than at the start of the year (Graph 1.5). The decline this year reflects a lowering in market participants’ expectations for the policy rate, and expectations that lower rates will be sustained for an extended period. Despite the fall in longer term yields, estimated term premia for US Government bonds remain higher than in recent years (though well below their longer term averages). Concerns about government debt sustainability may have contributed to the increase in term premia since the pandemic, alongside other factors such as reduced structural demand for longer term government bonds. Concerns about sustainability also appear to have played a part in pushing 30-year government bond yields higher in the United Kingdom, France and Japan, coming on top of a structural decline in demand from pension funds and life insurers for such long-dated debt (Graph 1.6). Even so, yields on ultra long-dated bonds are not typically referenced as benchmarks for other interest rates, such as those on corporate bonds or mortgages, and so they have a smaller influence on broader financial conditions than yields on bonds of 10 years or less. Term premia estimates for Australia have declined a little of late, after rising from lows reached during the pandemic.

Short-end Australian Government bond yields have risen since the August Statement, while long-end yields are little changed, leaving the yield curve flatter.

The increase in short-end yields has been driven by market participants’ higher expectations for the cash rate. Long-run expectations for inflation implied by inflation-linked Australian Government bonds have declined from their 2023 peaks, although have risen a little in recent months. Technical factors – including reinvestment flows from a sizeable inflation-linked bond maturity in September – have contributed. Overall, therefore, market-based measures of inflation expectations are judged to have remained consistent with the 2–3 per cent inflation target range (see Chapter 2: Economic Conditions).

1.2 Corporate funding markets

Risk premia in advanced economy corporate funding markets remain very low.

Equity prices in Australia have increased since the August Statement, although by less than in other advanced economies (Graph 1.7). This difference in part reflects the upward revision in market expectations for the cash rate in Australia, mixed earnings announcements for the June 2025 half year for Australian companies, and little change in their earnings forecasts. Aggregate underlying profits for ASX 200 companies for the June 2025 half year were very similar to the same period last year, and operating profit margins have been stable in aggregate as companies continued to implement cost-saving initiatives. Equity prices in other advanced economies have been supported by optimism around AI, better-than-expected earnings in the United States, and an overall decline in concerns about the potential impact of the US administration’s policies on global economic activity and firms’ earnings. Market expectations for monetary policy settings have also supported riskier asset prices in some advanced economies, along with expansionary fiscal settings.

Corporate bond yields in the United States have declined since the August Statement, largely reflecting a decline in risk-free rates, while yields in Europe and Australia are little changed (Graph 1.8). Corporate bond spreads over risk-free rates in Australia, the United States and Europe remain narrow.

The value of funds raised by large firms has increased over recent months in Australia, the United States and Europe amid favourable funding conditions. Initial public offerings have increased in US equity markets, while corporate bond issuance has been robust across the United States, Europe and Australia (see below). Some high-profile defaults in US private credit markets have prompted market participants to re-evaluate loans and lending standards in that segment of the market. However, market pricing suggests that there are no broader concerns arising from these defaults at this point.

Low risk premia suggest that market participants are not placing much weight on the potential for materially adverse outcomes for economic activity or inflation from evolving policies (e.g. policies on trade), or that they expect such risks to be offset by fiscal stimulus or monetary policy. Consequently, there is a risk that unexpected outcomes could prompt a significant tightening of financial conditions – for example, by driving a significant decline in equity prices and/or a widening in corporate bond spreads. Market participants appear sensitive to developments that challenge the current positive risk sentiment in markets. For instance, concerns about regional banks in the United States prompted a short-lived decline in equity prices in advanced economies and a widening in corporate bond spreads. Nevertheless, the equity risk premium remains around multi-decade lows in the United States and Australia and close to multi-decade lows in the euro area.

Chinese equity prices have increased significantly over recent months, despite an escalation in US–China trade tensions. Mainland equity prices have increased by 15 per cent since the August Statement, driven by a 43 per cent increase in the IT sector on improved sentiment around AI developments in China (Graph 1.9). While price-to-earnings ratios are above their longer term average, many commentators viewed Chinese equity markets as undervalued prior to the recent increase in equity prices. The improvement in risk appetite has led investors to increase their allocation to equities in search of higher returns, contributing to a rise in long-term Chinese Government bond yields.

1.3 Foreign exchange markets

The Australian dollar trade-weighted index (TWI) remains within the range observed over recent years.

The Australian dollar has appreciated slightly on a TWI basis and against the US dollar since the August Statement (Graph 1.10). It has been supported by an increase in short-term interest rate differentials between Australia and other advanced economies over this period. Concerns about a renewal in trade tensions between the United States and China have at times weighed on the Australian dollar in recent months. Overall, the response of the Australian dollar to these developments suggests that the exchange rate would be likely to help buffer the Australian economy if there is a further escalation in global trade tensions. The Australian dollar TWI has appreciated a little in real terms over recent quarters, and remains close to estimates implied by the long-run historical relationship with the forecast terms of trade and real yield differentials (Graph 1.11).

The US dollar has been little changed on a TWI basis since the August Statement, despite a decline in US government bond yields, after having depreciated significantly in the first half of the year from the very high levels at the start of 2025 (Graph 1.12). The fact that the US dollar has not depreciated further may suggest some easing of investor’s concerns about the elevated policy uncertainties in the United States, including around trade policies and the ongoing shutdown of the US federal government. The easing of market participants’ concerns is consistent with the narrowing of premia in risk assets that has occurred over this period (see above). Some commentators have suggested that the sharp increase in gold prices over 2025 reflects increased concerns about global fiscal sustainability and broader policy uncertainty (Graph 1.13). While there may be some element of these concerns underpinning higher gold prices, much of the increase reflects increasing purchases from emerging market central banks over recent years, as well as recent interest from speculative investors, amid relatively constrained global supply.

1.4 Australian banks and credit markets

Reductions in the cash rate this year have passed through to banks’ funding costs and lending rates.

The RBA’s estimate of major banks’ funding costs has declined by around 90 basis points since late 2024 (Graph 1.14). This largely reflects reductions in deposit rates: at-call deposit rates have declined by around 50 basis points since late 2024, while new term deposit rates have declined by around 75 basis points alongside similar declines in bank bill swap rates (BBSW).¹ Pass-through to average at-call deposit rates is typically less than 100 per cent because some deposit accounts have interest rates that do not move with the cash rate. Declines in banks’ hedging costs have also contributed, reflecting narrower spreads between current BBSW and the longer term swap rates used when the hedges were established. Spreads between bank bond yields and swap rates have narrowed over the year – and are around their narrowest since early 2022 – which has contributed to lower costs for banks to issue new wholesale debt. The pace of bank bond issuance is around its decade average.

Lending rates for households and businesses have declined in line with reductions in the cash rate and other reference rates (Graph 1.15). Average interest rates on variable-rate mortgages have declined by around 75–80 basis points since the turn of the year. There are some signs of strengthening competition in the mortgage market, including continued growth in refinancing activity and the introduction of sign-up incentives. The share of fixed-rate lending remains very low at around 4 per cent of the outstanding mortgage stock. Average interest rates on variable-rate business loans have declined by around 80 basis points since January, alongside reductions in the cash rate and BBSW.

Spreads between banks’ lending rates and the cash rate remain well below pre-pandemic levels.

Spreads between banks’ lending rates and the cash rate narrowed through the pandemic, reflecting a decrease in funding cost spreads and strong competition between lenders (Graph 1.16). Changes in bank funding costs relative to the cash rate are influenced by factors such as banks’ funding composition, risk premia, and regulation. For example, following the global financial crisis (GFC), funding cost spreads rose sharply amid an increase in risk premia and as banks shifted their funding mix towards more stable funding sources, including in response to regulatory changes. During the pandemic, banks’ funding mix shifted towards a higher share of at-call deposits, which are a lower cost source of funding and generally respond less than one-for-one with changes in the cash rate.² This contributed to a narrowing in funding cost spreads as interest rates rose in 2022, which has persisted. This trend, as well as strong competition between lenders and resilient loan book performance, has contributed to lending rate spreads also declining over recent years. Spreads between variable mortgage rates and the cash rate are around 65 basis points below their pre-pandemic level, while spreads on variable-rate business loans are around 55 basis points below. As noted above, corporate bond spreads are also at very low levels.

Together, the earlier decline in spreads on bank loans and corporate bonds mean financial conditions are less restrictive than they were pre-pandemic for a given level of the cash rate. However, this is likely to have been captured in our estimates of the neutral rate, which have risen over recent years. Indeed, the cash rate is now below central estimates of the neutral rate from some models. These spreads are also factored into the compilation of the macroeconomic forecasts.

Scheduled mortgage payments have declined as a share of household disposable income since late 2024 but remain above their average of the past two decades.

Scheduled principal and interest payments on mortgages decreased further in the September quarter to 9.8 per cent of household disposable income (Graph 1.17). Nonetheless, they remain high as a share of household disposable income relative to historical averages and continue to put pressure on household budgets.³ However, total scheduled household debt payments (including estimated repayments on consumer credit) are slightly below the 2010 peak as a share of household disposable income, owing to a notable decline in the use of consumer credit since the GFC.

The flow of extra mortgage payments into offset and redraw accounts has remained well above average. While the decline in interest rates could be providing an incentive for households to save less, extra mortgage payments are affected by a range of factors. Some banks also keep borrowers’ scheduled mortgage payments unchanged when mortgage rates decline unless borrowers request otherwise, which typically results in an accumulation of excess payments for a time.

Total credit growth increased in the September quarter and is well above its post-GFC average.

Total credit is currently growing faster than nominal GDP, underpinned by strong business credit growth (Graph 1.18). Stronger nominal credit growth has also contributed to a pick-up in broad money growth, which can provide a timely – though typically very imprecise – signal of trends in aggregate demand and inflation. The ratio of household credit to household disposable incomes (HHDY) stabilised in the June quarter, after having declined over the post-pandemic monetary policy tightening phase. However, after deducting offset balances, this ratio continued to fall in the June quarter. Offset balances effectively reduce interest payable on outstanding mortgage debt, so deducting them from credit provides a clearer picture of trends in net household indebtedness. Meanwhile, business debt has been growing faster than GDP, such that the ratio of business debt to GDP is now back to around its pre-pandemic level.

Housing credit growth picked up further in the September quarter, consistent with borrowers responding to the easing in monetary policy that began in February.

Total housing credit growth has picked up to above its post-GFC average, largely reflecting an increase in investor credit growth (Graph 1.19). Investor credit growth has increased to its highest rate since 2015, alongside a pick-up in housing price growth (see Chapter 2: Economic Conditions). Growth in population and nominal household disposable income is also contributing to strong growth in nominal credit. Indeed, growth in owner-occupier credit (which comprises two-thirds of outstanding housing credit) has also increased over recent months, but by much less. Differences in investor and owner-occupier credit growth are consistent with the fact that the former has historically been more responsive than the latter to interest rate cuts. Housing loan commitments (a leading indicator of housing credit) have also been strong recently.

In previous monetary policy easing phases, the timing and magnitude of the response in housing credit has been quite varied (Graph 1.20). The increase in total housing credit growth in the current cycle is well within the range of previous experiences, with the response of investor credit growth towards the stronger end of the range, while the response of owner-occupier credit growth has been around average relative to comparable points in previous easing phases. This partly reflects the fact that investor credit growth was already increasing prior to the first interest rate cut in February, while in most previous easing phases both investor and owner-occupier credit growth responded with a lag.

The Australian Government 5% Deposit Scheme came into effect on 1 October 2025. This scheme is an extension of the Government’s previous Home Guarantee Scheme and allows first home buyers to purchase a property with a 5 per cent deposit without paying lenders’ mortgage insurance (which generally costs between 1 and 5 per cent of the loan amount and is typically required for loans where the borrower has a deposit of less than 20 per cent of the property’s value). Owner-occupier first home buyers currently make up nearly 20 per cent of new housing commitments. The new scheme has no income caps nor limits on take-up, and maximum property price caps have been increased to $1 million or more in some capital cities and regional centres.⁴ It is difficult to quantify the expected effect of the scheme on housing demand, though it is likely to put at least some further upward pressure on housing credit and price growth.

Growth in business debt remains strong.

Business debt is growing at around its fastest pace since 2008 in nominal terms (Graph 1.21). The strength in business debt growth has been broadly based across industries. Business credit growth has been supported by strong competition among both bank and non-bank lenders.⁵ The value of bond issuance by non-financial corporations this year has been its strongest in the past decade as a share of GDP, amid favourable conditions in wholesale funding markets (Graph 1.22). Despite the strength in business debt growth, measures of aggregate business leverage remain low.⁶

Favourable conditions in credit and wholesale funding markets have made it easier and cheaper for many businesses to access external funding, supporting their ability to manage cashflows, grow and invest. This suggests that the availability of external funding is unlikely to have been a material constraint on business investment in recent quarters. However, business investment has historically had a weak relationship with aggregate business debt, partly because firms’ investment spending is typically largely internally funded (Graph 1.23). Investment decisions are also affected by a wide range of factors such as business profitability and broader economic conditions. Some components of new business lending that have been growing strongly of late have been for purposes that have a weak relationship to business investment, such as revolving credit facilities.

Endnotes

1 This rate of pass-through to at-call deposit rates is consistent with previous easing phases. Pass-through to the average at-call deposit rate is typically less than 100 per cent because some deposit accounts have interest rates that do not move with the cash rate – for example, transaction accounts that are non-interest-bearing. See De Zoysa V, J Dunphy and C Schwartz (2024), ‘Bank Funding and the Recent Tightening of Monetary Policy’, RBA Bulletin, April.

2 See n 1.

3 See RBA (2025), ‘Chapter 2: Resilience of Australian Households and Businesses’, Financial Stability Review, October.

4 Under the previous version of the scheme, there were limited places available under the scheme (e.g. 50,000 places in 2024/25) and there were income caps. Potential applicants needed to have a taxable income at or below $125,000 for individual applicants or $200,000 for joint applicants to be eligible.

5 For an overview of factors driving strong competition among lenders for business loans, see Harvey N, S Lai and J Spiller (2025), ‘Small Business Economic and Financial Conditions’, RBA Bulletin, October.

6 See RBA, n 3.