Recent Changes in Credit Markets and Their Implications for Monetary Policy

Why It Matters

Easier credit conditions mean the Reserve Bank of Australia must hold a higher cash rate to curb inflation, reshaping policy outlook and market expectations.

Key Takeaways

• Bank funding cost spreads fell ~70 bps since pandemic
• Variable mortgage rate spreads narrowed ~65 bps, boosting borrowers
• Business credit supply grew, non‑bank lenders' share rising sharply
• Lower funding costs may raise neutral interest rate, affecting policy
• Increased competition and technology drive tighter mortgage pricing

Pulse Analysis

The post‑pandemic credit environment in Australia has fundamentally altered the first stage of monetary‑policy transmission. Banks now rely heavily on at‑call deposits, a cheap funding source that rose sharply during the pandemic, compressing the spread between their funding costs and the cash rate. Simultaneously, wholesale‑funding metrics such as BBSW‑OIS spreads have narrowed, reflecting abundant liquidity and a shift toward an ample‑reserves framework. These dynamics lower the effective cost of bank lending, meaning that for any given cash‑rate target, borrowers face softer financing conditions than before.

Mortgage markets illustrate how competition and technology amplify these effects. Lenders have trimmed margins, offering cashback incentives and streamlined digital applications, which together have cut the spread between new variable mortgage rates and the cash rate by roughly 65 basis points. The convergence of new and outstanding mortgage rates further signals that borrowers are securing rates close to the lowest market offers, reinforcing household consumption and housing‑price stability. This competitive pressure, driven by broker platforms and reduced market concentration, is likely to persist, embedding a new baseline for mortgage pricing.

Business credit tells a complementary story. Non‑bank and private‑credit providers have surged, especially in SME segments, leveraging fewer prudential constraints to expand loan volumes. Their entry has intensified price competition, narrowing business‑lending margins by 10‑30 basis points and raising overall credit availability. For the Reserve Bank, these supply‑side shifts imply a higher neutral rate and a need to calibrate policy more aggressively to achieve inflation targets. Understanding these structural changes is essential for investors, lenders, and policymakers navigating Australia’s evolving financial landscape.