Banks are enjoying the cheapest money in history, RBA’s Chris Kent says

The RBA acted swiftly to ensure the functioning of the financial system in the early stages of the health crisis, Reserve Bank assistant governor Chris Kent says.

RBA assistant governor Christopher Kent. Photo: Hollie Adams

The Reserve Bank’s interventions through the COVID-19 recession and a major influx of cheap deposits have pushed the funding costs of the Australian banks to their cheapest levels in history, RBA assistant governor Chris Kent has said.

Speaking at a Kanga News event on Monday morning, Dr Kent outlined the central bank’s “unprecedented” responses to the early phases of the pandemic in March, when the global health crisis threatened to spill over into a financial crisis.

Dr Kent described how a collapse in sharemarkets around the world sparked an investor rush to cash which threatened to freeze up the trade in financial instruments.

Central banks including the RBA stepped in to inject liquidity into the banking system, and bought Commonwealth and state bonds to ensure a rational market and keep prices from tumbling.

The central bank also offered a massive cheap term funding facility for lenders to ensure they had access to cheap finance.

These interventions, alongside rate cuts to 0.25 per cent and pinning three-year bond rates at the same level, “have worked well”.

“The actions of the Reserve Bank have contributed to historically low funding costs for banks,” Dr Kent said.

Banks have also enjoyed a massive “influx of low-cost deposits,” he said.

“Some of that has come from businesses that tapped their lines of credit but then left those funds on deposit.”

“There are a number of other reasons for the increase in bank deposits. This includes increased spending by the Australian government, which leads to funds being paid out from the government’s account at the Reserve Bank to customers of commercial banks.”