Here’s why the RBA cash rate isn’t a ‘realistic guide’ for Australian companies raising debt

(Scott Barbour / Getty Images)
  • Australia’s big banks faced a difficult funding environment in 2018, amid a sharp rise in short-term lending rates.
  • ANZ’s rates team said the conditions were a reminder that the benchmark RBA cash rate isn’t a “realistic guide to the true cost of funds”.
  • Strategists Martin Whetton and Jack Chambers said they expect short-term funding costs to increase again towards the end of the year.

2018 has proven to be a more challenging year for Australian companies — most notably the big banks — to secure financing.

Higher bank funding costs made headlines through the middle of the year, after a sharp rise in the Bank Bill Swap Rate (BBSW).

The BBSW is the rate banks pay to borrow short-term funds, and it often trades at a premium to benchmark interest rates.

Towards the end of the June quarter, that premium rose more than 70 basis points (0.7%) above the Overnight Indexed Swap (OIS) rate, which is closely tied to benchmark RBA cash rates.

This chart from ANZ shows the move in the BBSW, for both 90-day loans and six-month loans:


Funding pressures often increase towards the end of a quarter, although the BBSW stayed flatter into the end of September.

That may be because banks issued less debt, “as credit growth has slowed and deposit funding has increased”, said ANZ rates strategists Martin Whetton and Jack Chambers.

However, the pair noted that the shift in the BBSW was a timely reminder for Australian companies with funding requirements.

Specifically, they need to consider what are the most important catalysts in the composition of their funding mix. (Hint: it doesn’t involve benchmark interest rates.)

“The biggest lesson for many borrowers in 2018 was that the policy rate is neither a realistic guide to the true cost of funds, nor an appropriate tool to manage those risks,” the pair said.

In additional comments made to Business Insider, Whetton elaborated on the idea.

He noted that throughout 2018, the benchmark RBA cash rate was “dead flat, as it has been since August 2016” and yet “the BBSW rose and fell up to 40 basis points”.

“So if you are paying the 3-month BBSW on a loan like a company does, you had almost two rate hikes added to the cost of floating rate debt.”

However, “none of the rise was as a result of market expectations the RBA would hike”, Whetton explained.

So paying OIS rates — the level associated with the RBA cash rate — “would have left you … with no cover for the rise in BBSW”.

The key takeaway is that “the stability of BBSW should not be assumed, even without markets pricing an RBA rate hike until 2020”, ANZ said.

Whetton and Chambers noted the BBSW has been “surprising stable” recently following that bout of mid-year volatility.

“This may be because banks have issued fewer bills, as credit growth has slowed and deposit funding has increased,” they said.

However, the spread between BBSW and OIS has still settled around 25 basis points higher than it was last year.

And three of the big four banks responded to the shift by raising mortgage interest rates.

Looking ahead, Whetton and Chambers said the BBSW “should push higher” towards the end of the year, which is what it has usually done in the past.

They also noted the US government is preparing to ramp up its issuance of US treasuries in the months ahead.

As a result, the pair expect short-term US rates to rise, which means the upward move in BBSW “could be exacerbated” as banks turn to the domestic market for their funding needs.