Bank predicts inflation to force the RBA’s hand – how much and when?
Days after AUSTRAC starts formal investigation, big bank breaks big news
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Australia’s banks are set to scramble for a slice of $64 billion in cheap funding from the Reserve Bank of Australia over the next three weeks. It’s the banks’ last chance to lock in ultra-low mortgage rates before funding costs start to climb.
The RBA’s $209 billion term funding facility (TFF) is set to expire at the end of this month. The TFF – an emergency measure enacted by the central bank last year at the height of the COVID-19 pandemic – was aimed at ensuring cash kept flowing through the economy, according to a report by The Australian. The facility allowed banks to price fixed mortgages.
Christopher Kent, RBA assistant governor for financial markets, said in a speech Wednesday that drawdowns on the TFF had sped up in recent weeks to $145 billion, similar to the demand in September for the initial tranche.
“We expect that the bulk of the available funding will be taken up because the cost of the facility remains well below the cost of similar funding available in the market,” Kent said. “Most banks are expected to take up most or all of their remaining allowances.”
Banks are already beginning to hike prices on fixed-rate loans as funding costs start to rise. This week, Westpac hiked its two- and three-year fixed mortgage rates by 0.1% to 1.89% and 1.98%, respectively. Commonwealth Bank raised its three- and four-year rates last month.
All of the rate hikes have been attributed to an expected increase in the cost of bank funding, The Australian reported.
The TFF’s expiration at the end of the month will increase banks’ dependence on pricier wholesale debt, which is likely to drive fixed rates further up. However, Kent downplayed the likelihood of any wider impact on the Australian economy, because variable-rate loans are still a much larger segment of the market.
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At the same time that banks have accessed inexpensive funding from the TFF, they have also taken advantage of a strong growth in deposits, The Australian reported. That growth has been partly driven by RBA purchases of government bonds from non-banks, as well as indirect effects from the TFF itself.
Kent said the impact of the TFF and the spike in low-cost deposits have caused the banking sector’s cost of funds to plummet to “historic lows.” That has been passed on in the form of lower interest rates for fixed loans, which in turn has helped drive a $400 billion-plus borrowing spree by homeowners.
Kent acknowledged that the cost of fixed-rate loans was edging upwards but said the increases had been “modest” thus far and rates were still “very low in historical terms.”
“In any case, fixed-rate loans at these longer terms account for a very small share of overall lending,” he said. “In short, there has been a bit of an increase in some new fixed rates, but the effect of this on broader financial conditions is minimal, and shorter-term rates, including for variable-rate loans – which constitute the bulk of credit – will remain low for as long as it takes to achieve the bank’s inflation goals [of 2% to 3%].”
Ryan Smith is currently an executive editor at Key Media, where he started as a journalist in 2013. He has since he worked his way up to managing editor and is now an executive editor. He edits content for several B2B publications across the U.S., Canada, Australia, and New Zealand. He also writes feature content for trade publications for the insurance and mortgage industries.
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