RBA sees rush from banks for cheap funding

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)


The Reserve Bank of Australia expects there will be a last minute rush from banks to take advantage of its low-cost funding program that is due to end this month.

The three-year term funding facility (TFF) was introduced by the central bank during the early stages of the COVID-19 pandemic and at a time of extreme economic uncertainty.

RBA assistant governor for financial markets Christopher Kent said to date around $145 billion has been drawn down from the facility.

“Banks have until the end of this month to draw on remaining allowances of $64 billion,” he told an online conference on Wednesday.

He noted drawdowns have accelerated in recent weeks – a similar experience to when the TFF was initially set to run until September 2020.

“We expect that the bulk of available funding will be taken up because the cost of the facility remains well below the cost of similar funding available in the market,” Dr Kent said in his speech to the KangaNews Debt Capital Markets Summit.

Like the record low official cash rate, the TFF rate is 0.1 per cent.

Dr Kent said lower funding costs for banks have led to lower borrowing rates for their business and household customers.

In the subsequent Q&A session, Dr Kent was asked what circumstances would be needed for the RBA to extend the TFF again.

“You would have to imagine you would need a sharp deterioration in economic conditions, and possibly a sharp deterioration in the state of financial markets,” Dr Kent replied.

The RBA has already flagged it will be making decisions on other key policy tools – the three-year bond yield target and its bond buying program – at its July 6 board meeting.

RBA governor Philip Lowe has already pencilled in a rare post-meeting media conference for that day, suggesting some significant policy changes will be announced in that regard.

However, the central bank has repeatedly said it will not lift the cash rate until inflation is sustainably within its two to three per cent target, which is not expected to occur until 2024.

Both the yield target and the bond buying program aim to keep market interest rates, and in turn borrowing costs, low for government and companies.

Dr Kent estimates 10-year market interest rates are 0.3 per cent lower than they would be without the bond buying program.

However, he noted an improvement in the economic outlook, globally and in Australia, had contributed to a rise in global market interest rates to around pre-pandemic levels.

At the same time, there has been an increase in inflation expectations from very low levels that are more in line with the central bank’s targets.

“The adjustments in financial markets to date are not a cause for concern,” Dr Kent said.

“They don’t point to inflation over the coming years sitting above central bank targets in a sustainable way.”


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