Daily Commentary BY THE CURVE TEAM –

Is it Worth Waiting?

12th of February, 2021

With rates very low, it is hard to know how to invest.

Although rates seem low currently, it is unlikely it has hit a low point. There is still some $100 billion of TFF to be drawdown. If the second round of TFF funds is anything like the first which is expired in September, then almost all the available funds will be utilised and ADIs will wait until very close to the end of June deadline.

These TFF funds act as a substitute for deposits to some extent, so ADIs will have less need to raise funds through deposits, which will keep pushing rates down. Additionally, the RBA will purchase an additional $100 billion of government bonds under its QE programme, which will provide even more liquidity in the system well past the middle of the year.

These factors mean the outlook, at least until the middle of this year, is for rates to continue to go lower. Countering this downward pressure will be retail deposits falling as consumers spend more of their savings (which last check was very high at 18%) and as government wage subsidies end in the middle of the year. However, this is unlikely to offset the enormous amounts of liquidity being provided by the RBA.

Beyond the middle of the year there should be more pressure for rates to increase. The TFF should have ended, as the RBA has indicated they will do. As the world is vaccinated, the potential for borders to open will be greater, which will encourage consumers to spend, and both businesses and consumers to borrow. The government will likely continue to pull back on its support and let consumers and businesses become the main driver of growth.

This may not eventuate. Slow vaccination progress or covid outbreaks could prompt a lack of economic activity, which would reduce the need for ADIs to raise deposits. It could also prompt more government spending and more RBA easing. Even independent of these economic factors, the RBA could continue to provide massive amounts of liquidity into the system because overseas central banks are doing the same. So, the possibility for sustained low rates into 2022 is possible.

Even if the upside scenario eventuates, rates will remain low. Using pre-covid levels as an example, term deposits with maturities of a year were at most 100 basis points above the cash rate, but in reality, were closer to 50-75 basis points above. This was under conditions where surplus ES balances were very small, i.e. consistently under $5 million and the RBA’s cash rate target almost always translated to the actual cash rate.

The sheer amount of liquidity the RBA have injected into the system means ES balances have ballooned to over $100 billion and at this rate will rise above $200 billion. The actual cash rate is also trading well below the current target of 0.10%. This means even as upward pressure on rates comes to fruition, they are unlikely to reach the 50-75 basis points above the cash rate target.

A return to those levels will be more likely as the TFF begins to be repaid. This will drain much of the excess liquidity in the system and switch ADIs reliance of funding back towards deposits rather than the RBA. This will not begin until the middle of 2023. This still assumes that the RBA and government continue to take a backward step until that point.

So in summary, rates will likely continue to go lower in the short term and remain low for some time.

Josh Stewart

Associate - Money Markets