The days of super-cheap funding costs are over for Australian banks, as they return to the capital markets for funding, according to the Reserve Bank’s latest Statement on Monetary Policy.

The RBA reported that banks raised A$22 billion of funding in bond markets in January, indicating a return to issuance at higher levels than during the past two years.

Bank bond spreads and reference rates rose in late 2021, increasing the cost of that debt issuance. The three-month swap rate rose from a low of 2 basis points in the middle of last year to current level of 6 bps. The six-month swap rate has risen from 2 bps to 14 bps over the same period.

The RBA said this did not materially affect banks’ overall funding costs last year due to limited issuance.

But further wholesale issuance over 2022, and any further increase in issuance costs, will put upward pressure on banks’ funding costs this year.

Throughout 2021, banks’ funding costs declined as BBSW rates, to which much of banks’ wholesale debt funding is linked, remained low consistent with the low level of the cash rate and the banks’ other policy measures.

Low funding from the TFF contributed directly to lower funding costs for banks and will continue to do so until 2024.

In addition, the stock of low-rate deposit funding in the banking system continued to grow strongly over 2021. Rates on new term and at-call deposits fell by around five to 10 basis points over 2021.

The RBA’s bond purchases created deposits because payments for bonds purchased from the non-bank sector were credited to the deposit accounts of the sellers.