Analysis: Win for RBA’s TFF As Initial Allowance Absorbed by Sep 30 Deadline

• Published on
• 01 Oct 2020, 09:37 AM

By Sophia Rodrigues

A few months ago, the Reserve Bank’s Term Funding Facility was the new kid on the block in Australia, viewed with scepticism by many that questioned its effectiveness as an unconventional monetary policy instrument.

But in six months, TFF has proved its worth as one of the most flexible and multifaceted monetary policy tool of the RBA, and an effective one.

There is no better time to celebrate its accomplishment than on the last day of September when banks have drawn down their entire initial allowance of A$84 billion.

Under the TFF, the RBA offers three-year funding to authorised deposit-taking institutions through repurchase transactions at a fixed pricing rate of 25 basis points per annum.

INITIAL RESPONSE LUKEWARM

Back in March, the RBA introduced TFF as an interest rate tool to reinforce the benefits of a lower cash rate by reducing funding costs of banks, and as a facility that encourages banks to expand their lending.

Its role has now extended to be a liquidity tool and as a guide for short-term interest rates. In that sense, it is effectively the RBA’s most powerful monetary policy instrument, more powerful that its conventional cash rate target.

Banks are using it to expand their lending, to replace more expensive sources of funding and to buy other assets, including government debt.

“Funding is fungible, but we can see that all of these options are being taken up by banks,” Deputy Governor Guy Debelle said in a recent speech.

In the first two months, the response to TFF was low with banks drawing down just A$6.3 billion or 7.5% of the initial allowance. By early August, the pace improved with banks taking up A$28 billion or 33% of the initial allowance. The final month saw strong demand with 50% of the allotment accessed in September alone.

The outcome has been in line with the RBA’s expectation that it would be fully drawn before the end of the September 30 expiry.

From October 1, banks will have access to supplementary allowance which is 2% of their outstanding credit, and additional allowance which is based on their loan growth. The total allowance including the amount already drawn works out to A$200 billion and this may increase depending on credit growth.

The RBA announced supplementary allowance at the board meeting last month, making it clear it is an easing in monetary policy. It reflects the importance of TFF as a preferred monetary policy versus an aggressive large-scale purchase of government bonds.

MONPOL EASING TOOL

The RBA sees balance sheet expansion from TFF as similar to that from bond-buying operation, and any expansion of TFF is thus considered to be further easing in monetary policy.

So far TFF has helped in lowering lending rate and it has also led to reduction in offshore wholesale lending of banks. The weight of TFF money also led to reduction in government T-Note yields and the last auction saw short-term yield drop to 0.1%, below the current cash rate of 13bps.

The RBA is expected to lower interest rate on TFF to 0.1% when it cuts the cash rate target most likely in November, and this could lower lending rates further.

--Contact: Sophia@centralbankintel.com