But future use to be more selective
The Term Funding Facility (TFF) helped stabilise financial markets, according to a recent review by the Reserve Bank of Australia (RBA).
The central bank introduced the TFF in March 2020 as part of its emergency response to the economic challenges brought on by the COVID-19 pandemic.
The RBA stated that the TFF, along with other monetary policy measures, reduced banks’ funding costs, which subsequently led to lower lending rates across the economy. Many households took advantage of historically low fixed-rate loans, driving fixed rate mortgage lending to record highs. This, in turn, supported household consumption, housing investment, and broader activity in the housing market.
“The TFF met the objectives we set out for it at the start of the pandemic,” said Christopher Kent (pictured above), RBA assistant governor for financial markets. “It helped prevent dire economic outcomes at a time when the outlook was bleak and highly uncertain, and there was limited scope for further cuts to the cash rate.”
However, the RBA review found that business lending saw a more subdued impact. While some small and medium-sized enterprises (SMEs) benefited from increased lending, overall business credit did not rise as much as expected. The report noted that government support programs had strengthened business cashflows, reducing the need for new finance.
The RBA estimated the cost of the TFF at approximately $9 billion, or around 0.5% of Australia’s GDP. This cost arose from the difference between the low, fixed rates provided to banks and the variable rates the RBA paid on exchange settlement balances. As interest rates rose significantly from 2022 due to inflation, the cost of these exchange settlement balances increased beyond original expectations.
The TFF also contributed to stronger economic outcomes, which improved government finances through higher tax revenues and lower support payments. The RBA acknowledged that quantifying these benefits remains challenging.
The review noted that while the TFF was successful in supporting the economy during the pandemic, the RBA would refine its approach to similar measures in the future. The central bank plans to improve scenario analysis in policy decision-making, particularly considering both downside and upside risks. In hindsight, the RBA stated that a greater focus on upside risks could have resulted in a decision not to extend the TFF in September 2020.
The RBA board also indicated that unconventional monetary policy tools, like the TFF, should only be considered in extreme situations when traditional measures, such as adjusting the cash rate, have been exhausted.
“Would the RBA use a term-lending tool again in the future?” Kent said. “The board would consider such a tool in extreme circumstances when the cash rate target had been lowered to the full extent possible. But it would do so only after consideration of a wide range of scenarios and the associated risks, and with a broader range of operational options than were available at the time of the pandemic.”
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