RBA Kent: Would Consider TFF Type Tool Again in Extreme Circumstances

• Published on
• 09 Oct 2024, 11:00 AM

--Total cost of TFF to RBA A$9 billion
--Material financial cost because of fixed rate on TFF
--Around A$4 billion cost was due to TFF extension
--Greater focus on upside economic outcomes could have led to different TFF calibration

By Sophia Rodrigues

(Sydney, October 9, 2024) – The Reserve Bank of Australia achieved the objectives it aimed for its term lending facility (TFF) but the significant cost associated with it means it would only consider the tool again in extreme circumstances when the cash rate is lowered to the full extent possible and after considering a wide range of scenarios and risks.

In a speech announcing the review of the TFF Wednesday, Assistant Governor Christopher Kent said the total cost to the RBA was A$9 billion, with A$4 billion of this cost being the result of extending the TFF in early September 2020.

The fixed-rate nature of the TFF was the main reason for this cost but the RBA said it opted for the fixed rate to give banks and borrowers certainty and thus reinforce other elements of the policy package in response to the Covid crisis. This cost was incurred because the RBA ended up raising the cash rate target by much more and much sooner than it expected, Kent said.

The ultimate beneficiaries of this fixed rate were borrowers who had locked in low fixed rate loans.

The TFF extension was another reason for the cost that could have been avoided had the RBA placed greater focus on potential upside economic outcomes. The RBA also didn’t realise that banks may not have needed more TFF funding because they had taken up just 60% of their initial allowances when the extension was announced.

“This suggested that the banks did not need TFF funding to compete for, or satisfy, the demand for borrowing from households and businesses. Rather, the banks waited until as late as practical to draw down TFF funds because doing so extended the time the TFF would contribute to meeting regulatory liquidity requirements on the banks,” Kent said.

In terms of lessons, the RBA learnt that forward planning is very important and it could not have undertaken floating-rate term-lending back then because neither the RBA nor the banks were readily able to undertake floating-rate repos. These systems have been upgraded now, providing the capacity to easily undertake either floating or fixed-rate repos.

The RBA has also agreed to strengthen the way it considers risks, including by examining a wide range of economic scenarios when making policy decisions involving unconventional tools, and how to judge appropriate exit paths from such tools.

“In retrospect, a greater focus on potential upside economic outcomes could have led to a different calibration of the TFF, including deciding not to extend it in September 2020,” Kent said.

--Contact: Sophia@centralbankintel.com