RBA finds little evidence cheap loans boosted business borrowing

SYDNEY – The Australian central bank’s cheap lending facility introduced in 2020 as part of its Covid-19 policy response failed to boost borrowing by businesses, particularly smaller companies, a Reserve Bank of Australia (RBA) research paper found. 

The Term Funding Facility (TFF), under which the RBA provided credit for three years at near-zero interest rates, was designed to ensure lenders had access to funds and to help lower borrowing costs for businesses. Similar measures were adopted by central banks in other parts of the world.

The finding adds to a body of evidence that the RBA’s Covid-19-era policies had limited or even negative results – the highest profile being time-based forward guidance on when rates were likely to rise. It also adds to reviews by other central banks that suggest cheap lending had limited impact.

“Similar to our results, global evidence to date is mixed on the effectiveness of these features in promoting lending,” RBA researchers Sharon Lai, Kevin Lane and Laura Nunn said in the report released on Tuesday.

The paper found no evidence that the additional allowance was effective in increasing the amount of lending to small- and medium-sized enterprises (SMEs), and no evidence that a lender’s take-up of the TFF increased their business lending.

It also found mixed results regarding the effect of the availability of the TFF on banks’ lending to businesses – lending growth was greater for TFF-eligible banks than for ineligible non-banks, but this was driven mostly by large businesses drawing on credit lines.

“Overall we find little evidence that the TFF caused the amount of lending to businesses, including to SMEs, to be higher than would have occurred if the policy were not introduced,” the researchers said. BLOOMBERG