Speech by Christopher Kent Assistant Governor Financial Markets) Kanganews - 26 March 2026

Why It Matters

Understanding the gap between the cash rate and the evolving neutral rate helps investors and borrowers anticipate future RBA actions, influencing credit costs, asset prices, and the broader Australian economy.

Key Takeaways

• RBA raised cash rate after reassessing less restrictive financial conditions.
• Neutral rate estimates vary widely; short‑run neutral now higher.
• OIS curves shifted up, signaling market expectation of tighter policy.
• Strong credit growth and dollar appreciation indicate easing financial conditions.
• RBA monitors multiple indicators to gauge policy stance amid global shocks.

Summary

Assistant Governor Christopher Kent used the KangaNews forum to explain how the Reserve Bank of Australia evaluates financial conditions and sets the cash rate. He outlined the board’s recent decision to raise the cash‑rate target in February and March, driven by a reassessment that late‑2023 financial conditions were less restrictive than previously thought, and introduced a conceptual framework distinguishing long‑run and short‑run neutral interest rates. The speech highlighted that estimates of the neutral rate diverge across models—market‑based OIS expectations, VAR‑type macro models, and semi‑structural approaches—producing a wide band of possible values. Recent upward shifts in the OIS curve and a 10‑30‑basis‑point rise in short‑run neutral estimates suggest markets now anticipate higher rates for the next few years. At the same time, a stronger Australian dollar, narrowing mortgage spreads, and robust credit growth point to easing financial conditions, complicating the assessment of policy stance. Kent emphasized that the neutral rate is a “conceptual cornerstone” for policy judgment, noting that the long‑run neutral reflects global savings‑investment balances while the short‑run neutral fluctuates with shocks such as fiscal deficits, the green transition, and the AI boom. He cited concrete data: the trade‑weighted index aligns with model‑predicted equilibrium, variable mortgage rates sit about one percentage point below the cash rate, and credit growth has rebounded above its long‑term average. The implications are clear: the RBA must balance tighter policy to curb inflation against signs that financial conditions are loosening, meaning future rate moves will depend on how quickly the neutral rate stabilises and how external factors evolve. Market participants, borrowers, and investors should monitor the evolving spread between the cash rate and the neutral rate, as well as exchange‑rate dynamics, to gauge the likely trajectory of Australian monetary policy.

Original Description

Speaking to the KangaNews Debt Capital Market Summit, Assistant Governor (Financial Markets) Christopher Kent explains how the RBA’s assessment of financial conditions – and so the stance of monetary policy – has evolved.