COVID-19 pandemic emergency program cost $9b, but the RBA would do it again

A pandemic-era emergency program cost the Reserve Bank about $9 billion because the economy bounced back faster than expected.

The RBA’s Term Funding Facility was designed to keep loans flowing through the economy as Australia stared down the harshest economic shock in a century — amid a suite of stimulus measures by the bank and governments.

The facility offered cheap, fixed-interest loans to banks, and about $188b was borrowed through the scheme.

It helped boost access to credit, bringing down borrowing costs for Australian punters.

But a review of the program released by the central bank on Wednesday showed the RBA ultimately posted $9b of losses, after rocketing inflation forced an increase in interest rates.

Ironically, those rising interest rates meant the TFF’s huge fixed-term loan book — set at near-zero rates — was sent quickly underwater.

The RBA had projected the scheme would break even or potentially run at a small profit.

The review said the bank had focused too much on the potential downside risk to the economy from the pandemic when the program was launched, and not enough on the upside — unemployment falling rapidly and inflation rising.

“In retrospect, a greater focus also on upside risks could have led to a different calibration of the scheme, including a decision not to extend the (stimulus) in September 2020,” the review said.

Speaking in Sydney on Wednesday, RBA assistant governor Christopher Kent said there had been broad economic benefits from the TFF.

“The (facility) was part of the insurance the RBA took out against a catastrophic economic outcome,” Mr Kent said.

He said the program had met the objective of when it was launched in early 2020 — helping avoid dire outcomes in a “bleak and highly uncertain” time.

The biggest benefits flowed through to borrowers who switched to fixed-rate loans.

“The share of new housing lending at fixed rates rose from around 15 per cent at the start of the pandemic to a historical high of over 45 per cent by mid-2021,” he said.

“Not only were existing borrowers switching from variable to fixed rates, but new mortgage lending also picked up noticeably through 2020 and into 2021.

“(The stimulus) helped to support dwelling investment, the housing market more broadly, and other elements of aggregate demand.”

The review said a similar program could be used in a future emergency — but recommended a rethink of the design.