Analysis: TFF Emerging as RBA’s MonPol Rate as Cash Rate Becomes Redundant

By Sophia Rodrigues

A significant shift in the framework of the Reserve Bank of Australia’s monetary policy is underway that could culminate into the Term Funding Facility becoming the effective instrument for implementing monetary policy and making the cash rate target almost redundant for the next few years.

The interest rate corridor system of implementing monetary policy will remain but the width could narrow further, and the determinants of the width would be almost entirely based on the TFF. The rate on the TFF would determine the higher end of the corridor, and the amount of TFF would determine the lower end because surplus balances in Exchange Settlement account would be mainly due to TFF.

This doesn’t mean the RBA will do away with the cash rate target but it means the TFF rate will always be the same as the cash rate target.


The shift is taking place via banks’ reduced reliance on RBA’s domestic market operations in favor of funding from TFF and RBA’s bond-buying under the yield target policy.

It is worth noting that the RBA’s daily transactions and the interest rate corridor have been the most important tools that have helped guide the cash rate to the target.

From January 2010 to March this year, the RBA held a record for ensuring its published cash rate was identical to the cash rate target. The RBA did this by setting the supply of ES balances, and managing it through its open market operations (mainly repos).

 The deviation in March was caused by infusion of large amounts of liquidity via repos, TFF, and government bond purchases. Since then the cash rate has tracked the lower bound of the corridor which is the interest rate on ES balances.

In line with increase in liquidity, daily volume in the interbank overnight cash market fell sharply and on several days it fell below the minimum A$500 volume required to publish the cash rate, thus requiring the RBA to rely to fallback provisions. Prior to March, the average volume in the interbank cash market was A$4 billion to A$5 billion.

On September 9, the volume fell to a record low A$8 million, making it increasingly likely that there will now be days when there is zero volume. The A$8 million record low follows another record touched just a day before when the volume was just A$15 million.

CB-Intel had discussed the possibility of the cash rate becoming obsolete in an article published on May 8.


It is interesting that at a time the volume in the interbank cash market has dropped to record low, the outstanding amount in the RBA’s repos has also fallen sharply. As of Wednesday, the outstanding amount is around A$62 billion which compares with average of A$53 billion in the year to February, and record high of A$102 billion on June 2.

The outstanding repo amount is expected to fall further in the weeks ahead as new repos contracted with the RBA continue to be significantly lower than the maturing ones.

For example, from July 1 to September 9, the new repos totalled A$26 billion while the repos maturing during this period were around A$58 billion.

A decline in repo volume reflects stabilization of financial conditions, and increase in ES balances due to TFF as banks have so far accessed A$52 billion, and also RBA’s bond-buying.

By the end of September, around A$32 billion of the initial TFF allowance will expire, and it is expected that banks will take up their entire allowance or at least a large chunk of it. After that banks have access to more TFF funding of around A$120 billion which would increase further depending on their loan growth.

This means the reliance on RBA repos could decrease sharply to a point where it would fall to a few millions like the interbank overnight transactions.

That would make RBA’s key domestic market operations nearly extinct, and the TFF the new hero.

Supporting the TFF would be RBA’s bond purchases under the yield target policy, and other purchases for liquidity management purposes.

You may recall CB-Intel expects the RBA to lower the cash rate target and the TFF rate to 10bps and cut the rate on ES balances to around 5bps, likely as early as October 6.