Australia's central bank will bolster its risk evaluation processes when deploying unconventional monetary tools, Assistant Governor Christopher Kent said in a speech on Wednesday.
The move comes in the wake of a review of the Term Funding Facility (TFF), a pandemic-era lending program that provided cheap credit to banks.
Speaking in Sydney on Wednesday, Kent highlighted the importance of improving the Reserve Bank of Australia's (RBA) approach when using unconventional policies, such as the TFF, which offered three-year loans at near-zero rates to ensure banks had access to funds while reducing borrowing costs for households and businesses. Similar programs were introduced by central banks globally during the pandemic.
“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.
Launched in 2020, the TFF met its objectives by lowering borrowing costs and stimulating demand. However, Kent noted that there are valuable lessons to be learned, particularly regarding the design and exit strategy for such programs.
He acknowledged that a greater focus on potential economic upswings could have prompted the RBA to alter the TFF’s scope, perhaps opting not to extend it in September 2020.
One of the primary issues with the TFF was its inflexibility as a fixed-rate facility, leading to significant financial costs for the RBA when inflation and economic recovery accelerated more rapidly than expected. The speed at which the TFF was implemented limited the bank's ability to fully assess and manage the associated risks, Kent added.
Looking ahead, the RBA will publish a new framework for its additional monetary policy tools next year, drawing on lessons from the TFF and other unconventional policies. This framework will outline how the central bank plans to evaluate costs and benefits more thoroughly and consider a broader range of outcomes when deploying such tools.
"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,” Kent explained.