The impact of Reserve Bank policy measures over the past year has been to reduce banks’ non-equity funding costs by about the same amount as the 65 basis point reduction in the cash rate since the end of February last year.

According to the latest RBA Statement on Monetary Policy, additional policy measures announced by the central bank late last year, including the extension of the TFF, are expected to lower banks’ funding costs a little further over the period ahead.

The cash rate was cut from 75 bps to 10 bps last year and bank bill swap rates fell by around 80 bps over the same period.

The banks have had strong deposit inflows and they have drawn down around A$86 billion under the Term Funding Facility, which has reduced their need for new wholesale funding.

The deposit share of banks’ total funding (including equity) has increased by around 4 percentage points over the past year.

Over the past year interest rates for new term deposits have declined by around 125 basis points, while rates for at-call deposits declined by around 50 bps.

The decline in the spread between interest rates on term deposits and other deposit rates is encouraging a shift by customers from term to at-call deposits.

These changes have led to a rise in the share of bank deposits paying low interest rates (of between zero and 25 bps).

In the September quarter last year, a little over a quarter of the liability funding of the major banks was in the form of such deposits. This compares with around 15 per cent in late 2019.