RBA to boost risk assessment when deploying unconventional tools

AUSTRALIA’S central bank will strengthen its assessment of potential risks when deploying an unconventional monetary policy, assistant governor Christopher Kent said following a review of a cheap lending programme for banks introduced during the coronavirus pandemic.

The Term Funding Facility (TFF), under which the Reserve Bank of Australia (RBA) provided credit for three years at near-zero interest rates, was designed to ensure lenders had access to funds and to help lower borrowing costs for households and firms. Similar measures were adopted by central banks in other parts of the world.

“The board has agreed to strengthen the way it considers risks, including by examining a wide range of economic scenarios when making policy decisions involving unconventional tools, and how to judge appropriate exit paths from such tools,” Kent said on Wednesday (Oct 9).

The TFF delivered on its policy goals by lowering borrowing costs and supporting demand following its launch in 2020, Kent said. He added that the RBA would use the tool again in extreme circumstances – though there were important lessons to be learned.

“In retrospect, a greater focus on potential upside economic outcomes could have led to a different calibration of the TFF, including deciding not to extend it in September 2020.”

The TFF lacked flexibility as it was a fixed-rate facility. That led to “material financial costs” for the RBA when the economic recovery and pick-up in inflation turned out to be much stronger and started much earlier than had been expected, Kent said.

The speed with which the RBA designed and implemented the TFF also limited its ability to fully consider and manage the associated risks, he added.

“Forward planning can expand the options available, help us to better weigh up the costs and benefits of each, and prioritise any pre-emptive operational work,” he said.

The RBA will publish a framework for additional monetary policy tools next year which will include the broader set of lessons learned from the combined use of a range of unconventional policies. BLOOMBERG