RBA sees monetary policy as somewhat restrictive as housing softens and global forces weigh

What happened

At its meeting earlier this week, the RBA’s Monetary Policy Board judged that monetary policy is somewhat restrictive. The three cash rate increases earlier this year are having their intended effects: borrowing costs and mortgage payments have risen, housing credit growth has slowed, Sydney and Melbourne housing prices have declined, and the Australian dollar has appreciated by around 5 per cent on a trade-weighted basis since the start of the year. The assessment is supported by estimates placing the current cash rate around the top of the range of central estimates of the nominal neutral rate. The Board also flagged uncertainty from a housing downturn that seems larger than the recent rate rises alone would explain, and from AI-related investment and large public debts globally that could make financial conditions less restrictive.

Why it matters

This assessment underpins the RBA’s forecasts for slow growth of aggregate demand, which is needed to reduce capacity pressures and bring inflation back to target. Yet other forces can alter how restrictive policy actually is. A softer housing market may make financial conditions more restrictive than the cash rate alone implies, while resilient global demand from AI investment and higher bond yields abroad from large public debts tend to make Australian financial conditions less restrictive, potentially requiring a higher cash rate than otherwise. These crosscurrents will be central to the Board’s future decisions.