The Reserve Bank of Australia’s September decision to pump billions of extra dollars into a program to offer low borrowing rates is about more than propping up ailing small businesses and households being clobbered during the pandemic.
Lifeline: butchers, real estate agents and medical centre operators are among the small-to-medium sized businesses supported by the September funding boost.
By boosting the Term Funding Facility (TFF) to around $200 billion, the central bank is not only striving to keep the economy and businesses afloat, it is also ensuring production capacity remains active which will be critical when the economy starts to recover.
Keeping businesses afloat
Dr Ben Wang from the Department of Economics at Macquarie Business School says it is important that the RBA’s TFF – which supports the supply of credit and lower interest rates to households and businesses – encourages banks to provide credit for small to medium-sized enterprises (SME) such as newsagents, butchers and real estate agents, ensuring they stay afloat during these challenging economic times.
“While facing high rates of unemployment and extreme economic uncertainty, demand for SME products and services may drop to dangerously low levels. Keeping businesses operating has an important supply side implication: it maintains the production capacity that is vital for the recovery of the economy,” Wang says.
Reduced funding costs means banks can afford to lower interest rates on mortgages and business loans, which in turn will support spending for households and firms.
This is consistent with policies like JobKeeper, where retaining trained staff means businesses can operate at their usual capacity to meet demand during the recovery phase.
“It would be harder to kickstart the economy if businesses have lost their production capacity as rebuilding it takes time and this could hold back any recovery,” he says.
Cheap money
The TFF provides liquidity to banks at a relatively cheaper cost, hoping they will pass on the saving to consumers and businesses while also encouraging lending to firms, especially SMEs, ensuring the liquidity is provided to those who may have otherwise lost access to credit.
Keeping the engine running: low borrowing rates mean businesses like newsagents can ride out the tough times while waiting for the economy to recover.
It was established in March 2020 as part of a policy package to support the Australian economy following the economic dislocation stemming from COVID-19. It is a source of low-cost funding for banks available for three-year terms at a fixed interest rate of 0.25 per cent.
Wang says the TFF has both demand and supply implications.
“Reduced funding costs means banks can afford to lower interest rates on mortgages and business loans, which in turn will support spending for households and firms. This is particularly important when the economy is facing a severe demand shortfall during the pandemic and the nation’s first recession in nearly 30 years,” he says.
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While Wang says many businesses that have been supported over the past six months may inevitably fail due to the difficult economic climate, there is no harm to provide an economic lifeline to those who can weather the storm.
Dr Ben Wang is a senior lecturer in the Department of Economics and a member of the Centre for Risk Analytics and Centre for Workforce Futures.
