Insight: RBA’s Likely Lower TFF Rate for New Borrowings, Not Existing

• Published on
• 27 Oct 2020, 09:30 AM

By Sophia Rodrigues

When the Reserve Bank of Australia lowers interest rate on Term Funding Facility, the reduced rate will apply to new drawings while the existing ones will remain at the higher rate.

On November 3, the RBA is widely expected to lower cash rate target to 10bps from 25bps, along with a cut in interest rate on TFF and three-year government bond yields.

Banks that have already drawn down funds under the TFF have technically borrowed via three-year repos at the rate of 0.25%. The rate on the repo was fixed and it is unlikely to get the benefit of a new, lower rate.

The funds that will be taken up once the rate is lowered will be available at the new rate.

TFF ALLOWANCES

Banks drew down A$81.25 billion of their initial allowance of A$84 billion of TFF as of September 30 which was the last day for the take-up. Since the total amount accessed on that day was A$83.19 billion it is likely banks took up some amount from their additional allowance.

From October 1, banks have access to supplementary TFF allowance and additional allowance. As of October 7, the additional allowance is A$59 billion and the supplementary allowance is A$56.8 billion.

Like the initial allowance, the supplementary allowance is expected to remain constant until end of June 2021, which is the last day it can be drawn.

However, the additional allowance can change every month depending on the stock of large business and small and medium enterprises’ credit outstanding.

Within additional allowance, changes could also occur in the amounts attributable to SME lending and big business lending.

On June 1, the amount attributable to small business lending was A$19.03 billion and for big business was A$47.84 billion.

But since then total additional allowance has declined mainly due to a large fall in big business lending. As of October 7, the total additional allowance attributable to small business lending was A$37.08 billion and for big business lending it was A$21.93 billion.

ADDITIONAL ALLOWANCE COULD DECLINE

As the additional amount changes, it is possible the additional allowance could decline for a bank and if this happens, they must return the amount if they’ve already drew it down. This likely happened in the first week of October when the total TFF amount accessed fell slightly to A$82.899 billion from A$83.194 billion the week before.

Since then only a tiny amount of TFF was drawn as banks are likely waiting for the RBA’s all-important November 3 monetary policy decision.

But only the new borrowing will get the benefit of the lower rate while existing initial allowance remains at the 0.25% rate.

--Contact: Sophia@centralbankintel.com