Daily Commentary BY THE CURVE TEAM –

RBA Expands Term Funding Facility

2nd of September, 2020

In an unexpected decision, the RBA has decided to expand and extend the Term Funding Facility.

The Term Funding Facility initially made available $84 billion of funding to ADIs with an interest rate of 0.25% to be repaid in 3 years. On top of this, every additional dollar lent to small businesses, an extra $5 was made available, and every extra dollar lent to large businesses an extra $1 was made available. The initial $84 billion was available up until the end of September and the additional allowance at the end of March.

Yesterday the RBA announced that beyond the end of September, another $57 billion would be available, which amounts to 2% of ADI’s overall credit. The end of March deadline for this 2% and the additional allowance was also extended to the end of June.

The move reflects frustrations from the RBA at a lack of lending. For 3 months overall credit has gone backwards despite the RBA and the government’s desire for credit to help support and stimulate the economy.

Already though $52 billion of the TFF has been drawdown by ADIs since its inception in March. This hasn’t coincided with a pick-up in lending, with a lack of demand for credit being cited as the primary reason. If the conditions for an economic recovery take shape, namely through the virus being contained and lockdowns being unwound, then there will be a plethora of cheap liquidity available to ADIs to fuel economic activity.

The adjustments to the TFF will continue to put downward pressure on interest rates across the economy. Various products such as home loans, term deposits, and bonds have already seen rates reduce with the initial TFF allowance, so an extension and expansion will continue to put downward pressure on rates.

Today Q2 GDP is out, with a 6% fall for the quarter expected. It is not expected to be market moving given it will be retrospective and the economic environment has already evolved significantly from Q2.

Josh Stewart

Client Relationship Manager