TFF was introduced in March 2020 by the Reserve Bank of Australia, to support the Australian economy in the face of economic and financial disruptions resulting from the COVID-19 pandemic, by reducing the funding costs to the banking system and in turn helping to reduce interest rates for borrowers. Under TFF, banks have been able to access three year funding at the fixed rate of 0.1 per cent, which has driven mortgage fixed rates under 2 per cent. However, once the scheme concludes at the end of this financial year, banks would have no choice but be more reliant on wholesale markets for funding, which will naturally result in a rate increase reflecting the higher costs. Before COVID, Australian banks raised more than $100 billion a year in wholesale funding from foreign and local investors, but the banks’ debt issuance slowed dramatically in the pandemic.
The Commonwealth Bank gave an early sign of the pressure on fixed-rate funding when it increased its three-year rate by 0.05 per cent late last month, in a move that rivals are likely to follow. Longer term fixed rates are also rising in response to higher bond yields. Rock-bottom fixed rates of under 2 per cent have been a critical ingredient in the property boom. With the Reserve Bank vowing to hold three-year government bond yields at 0.1 per cent, although shorter-term fixed rate loans will likely remain on a cheap level, a recent trend suggests rates on four and five-year fixed loans have probably bottomed and will likely drift higher.