There has been no shortage of commentary about the likely outcome of Tuesday’s Reserve Bank board meeting, with most pundits expecting the cash rate target to be cut to 10 basis points.
But Commonwealth Bank chief economist Stephen Halmarick said the important rate decision will be where the RBA moves the term funding facility rate, not the cash rate target.
What makes tomorrow’s monetary policy decision unusual is that the overnight cash rate is already well below the cash rate target, at 13 bps since the middle of August.
In normal circumstances, the RBA’s cash rate target and the overnight cash rate are almost the same. But with the flood of liquidity pouring into financial markets, the actual overnight cash rate has been below the target rate since March.
Cutting the cash rate target to 10 bps will not affect market dynamics all that much. A change to the TFF rate is a different story.
The RBA set up the TFF in March, giving ADIs access to at least A$90 billion in funding at a fixed interest rate of 25 bps for three years. Interest is due at maturity or when the use of the facility is terminated.
After an initial slow take-up, banks have applied for their allocations. ANZ noted in its 2019/20 financial report that it had drawn down $13 billion under the TFF – effectively replacing wholesale funding with cheap RBA funding.
Halmarick told Banking Day: “We expect four rates to be cut on Tuesday. The cash rate target will be cut from 25 bps to 10 bps. The TFF rate will be cut from 25 bps to 10 bps.
“The three-year bond yield target will be cut from 25 bps to 10 bps and the exchange settlement rate, which is 10 bps now, will be cut to 5 bps.
“The TFF rate is the rate that matters the most. Before COVID, around 55 per cent of bank funding came from domestic deposits, with the remaining 45 per cent from markets in one form or another. Now we have the RBA providing the TFF as a low-cost source of funds to the banking system.”
“If the TFF rate is cut, as we expect, that is the rate that is going to have an impact on the cost of funding. There will therefore be scope for banks to look at their deposit and loan rates.”