The COVID-19 crisis is ongoing. As such, many of the measures implemented by central banks to support the economic recovery will remain in place for a considerable period. On the other hand, financial market functioning has largely normalised and so usage of many of the facilities that were implemented to support markets have declined with the scaling back of certain programs. The big question is whether these will be restarted if needed?
The speed at which central banks in advanced economies like Australia have employed a wide range of tools to support their economies and financial systems has been unprecedented. In the early phase of the pandemic, the size of the shock to the real economy was expected to be large, but early on it was difficult to predict exactly how things were going to evolve. There was a sharp rise in volatility and in response and withdrawal of confidence which was sharper and wider than the GFC, the last major economic shock faced by SMEs.
The Reserve Bank’s Term Funding Facility (TFF) was announced in March 2020 as part of a monetary policy package to support the Australian economy in response to COVID-19 to assist in reducing funding costs and support the supply of credit across the economy and to support lending especially to small and medium-sized businesses. In September, the Reserve Bank Board adjusted the TFF in response to economic conditions, expanding and extending the facility and in November it lowered the interest rate on new drawings. The facility has contributed to an easing in financial conditions with bank funding costs and lending rates at now historic lows. The TFF aimed to encourage lending to SMEs because it was recognised that they faced particularly difficult economic conditions.
However, demand for business credit overall has been particularly soft, reflecting a reluctance by business to invest and take on additional debt in the current economic climate. Temporary incentives, such as JobKeeper, have also alleviated businesses need for funding by boosting cash flow. Banks are also cautious about lending to sectors heavily exposed to the COVID-19 shock (such as hospitality and accommodation) and to new unproven businesses.
The COVID-19 pandemic has resulted in a substantial increase in labour market underutilization, with more people wanting a job, or to work more hours than employers need. While the economic outlook is highly uncertain, it is likely that the unemployment rate will remain elevated for a number of years.
At year’s end, the demand for liquidity is reflected in businesses’ need to hoard cash and reduce their exposure to riskier positions in terms of customers, suppliers, revenue streams and any context that reduces their ability to respond quickly as things change.