What the Reserve Bank pays the banks

On Tuesday 29 September 2026 the Reserve Bank announced a 25 basis point rise in the cash rate target to 4.60 per cent, effective 30 September, the fourth rise of the year ¹. The interest the Bank itself pays on the money banks keep with it is linked to the cash rate. The Bank says those balances are ‘paid a floating interest rate linked to the official cash rate’ ⁷.

The sums are large. On THE RORT’s addition of three audited figures, the Bank paid about $36.9 billion in interest on those balances over the three years to June 2025 ⁶. The Bank does not publish the payment by institution, so none of it can be attributed to the big four or to any named bank, and this article does not attribute it.

The Bank’s own record has another side, and it is set out in full below. The Bank says the banks passed the lower funding costs of its pandemic loans on in full, and that borrowers who had locked in low fixed rates were ‘the ultimate beneficiaries’ ¹⁰. It also says its capital can be restored over time from its own retained earnings, and it rejected a capital injection from the government ¹². This article follows the money through the Bank’s audited accounts, its speeches and its own review of the Term Funding Facility, and says at each point whose claim is whose.

01How the Bank pays interest on reserves

The Bank pays interest on banks’ Exchange Settlement (ES) balances, the reserves they hold at the Bank ². The ES rate is the floor of the corridor around the cash rate target. As David Jacobs, the Bank’s Head of Domestic Markets, stated on 25 August 2026, ‘The ES rate is set 10 basis points below the cash rate target and the OMO rate 10 basis points above the cash rate target’ ². Assistant Governor Christopher Kent said on 2 April 2025 that the overnight standing facility provides reserves at 25 basis points above the cash rate target ³. The Bank’s annual report describes the arrangement in one sentence: ‘our ES balances (currently our main interest-bearing liability) are paid a floating interest rate linked to the official cash rate’ ⁷.

The rate was not always paid at that level. Before the pandemic the ES rate was 25 basis points below the cash rate target ⁵. On 19 March 2020 the Bank set it at 10 basis points, ‘rather than zero, to mitigate the cost to the banking system associated with the large increase in banks’ ES balances’ ⁵. On 3 November 2020 it went to zero as the cash rate target went to 0.1 per cent ⁵. From May to September 2022, as the cash rate rose from 0.10 per cent to 2.35 per cent, the ES rate rose from zero to 2.25 per cent, and the 10 basis point gap held ⁵.

Since May 2025 the Board has not announced the ES rate with its decisions. In the same speech, Kent said that ‘starting in May the Monetary Policy Board will announce the cash rate target in its decisions but not the ES rate’, adding that ‘from time to time the RBA may adjust the ES rate if that will help to better meet the objectives of the ample reserves system’ ³. Today’s decision statement does not state it ¹. The rate in force from 30 September is therefore not published, and THE RORT does not print a figure for it.

The balances themselves are far smaller than they were. ‘ES balances stabilised at around $460 billion in 2022, following the end of the bond purchase program’, Kent said in 2024, and they fell from February 2023 as bonds matured and the Term Funding Facility was repaid ⁸. The Bank’s weekly series put them at $186,719 million on 23 September 2026 ⁸.

02What it paid

The Bank’s audited accounts (Note 4, interest) give three figures. In 2022/23 it paid $12,603 million on an average ES balance of $447,551 million, an average rate of 2.8 per cent. In 2023/24 it paid $14,651 million on $351,869 million, at 4.2 per cent. In 2024/25 it paid $9,674 million on $233,674 million, at 4.1 per cent ⁶. For contrast, in 2021/22 the Bank’s total interest expense on all its liabilities was $411 million ⁶.

THE RORT’s sum of the three: $12,603 million plus $14,651 million plus $9,674 million is $36,928 million, about $36.9 billion over 2022/23 to 2024/25. The audited figures show both forces at work: the average balance fell from $447,551 million to $233,674 million while the average rate rose from 2.8 to 4.1 per cent ⁶.

The interest is paid to all ES account holders, and the Bank does not publish it by institution ⁶. It cannot be attributed to the big four or to any named bank, and this article does not do so.

The 2025/26 figure is not yet published. The Bank’s 2026 annual report was not available when THE RORT checked on 29 September ⁶. THE RORT has not estimated it: the weekly balances in the previous section are not an interest bill, and no rate has been applied to them.

03Why the balances were so large

The Bank attributes the surge in ES balances to its own pandemic measures. Its explainer on how it implements monetary policy names its measures ‘such as its “Term Funding Facility” and bond purchase program, which increased the supply of ES balances’ ⁴.

The bond purchase program ran from November 2020 to 10 February 2022 and bought $281 billion of Australian, state and territory government bonds in the secondary market ¹¹. Separately the Bank bought $36 billion of Commonwealth bonds for its 3-year yield target, which was dropped at the 2 November 2021 meeting ¹¹. The Term Funding Facility, covered in the next section, had $188 billion outstanding when it closed to new drawdowns ⁹.

The Bank’s own review of the bond program, given by Michele Bullock, then Deputy Governor, in September 2022, foresaw ‘the losses that the Bank is expected to incur over coming years because the return on its assets will be less than the interest paid on its liabilities’, ‘primarily balances in Exchange Settlement accounts’ ¹¹. The ES rate is the floor of the corridor around the cash rate ²; the Bank itself attributes the surge in balances to its own measures ⁴; and the interest follows the cash rate up ⁷.

04The Term Funding Facility

The Term Funding Facility (TFF) was announced on 19 March 2020: low-cost three-year funding for banks ⁹, at a rate first fixed at 0.25 per cent and lowered to 0.1 per cent in November 2020 ¹⁰. ‘The facility closed to new drawdowns on 30 June 2021, at which time $188 billion of funding was outstanding’, the Bank’s Term Funding Facility page says ⁹. By bank category, and not by bank, the Bank’s table shows what was drawn: major banks $133 billion, 100.0 per cent of their allowance; mid-sized banks $24 billion, 99.6 per cent; small banks $9 billion, 58.3 per cent; foreign banks $22 billion, 54.2 per cent ¹⁰. ‘Banks repaid all TFF funds as scheduled by mid-2024 without incident’ ¹⁰.

The Bank’s review, by Assistant Governor Christopher Kent on 9 October 2024, puts the cost to the Bank at about $9 billion: ‘The total cost to the RBA is estimated to have been $9 billion’ ¹⁰. It says the facility was profitable for the Bank until May 2022, and that after that the Bank was paying the banks more interest on their ES balances than they were paying on their fixed-rate TFF loans ¹⁰.

About $4 billion of the cost came from the Board’s decision in early September 2020 to extend the facility. At that point banks had taken up only 60 per cent of their initial allowances, almost half of that as late as August ¹⁰. The review reads that pattern as follows.

This suggested that the banks did not need TFF funding to compete for, or satisfy, the demand for borrowing from households and businesses.

The review gives the reason for the late drawdowns: ‘the banks waited until as late as practical to draw down TFF funds because doing so extended the time the TFF would contribute to meeting regulatory liquidity requirements on the banks’ ¹⁰.

There was a direct benefit to the major banks, and the Bank measures it. ‘For the major banks, the TFF was around 60 basis points cheaper than issuing bonds during the TFF drawdown phase (Graph 2). It lowered their average cost of funds by around 5 basis points’ ¹⁰.

05Who carried the loss

The Bank’s interest account shows the gap. Its total interest expense on all liabilities was $18,425 million in 2023/24 and $13,404 million in 2024/25, against total interest income of $10,653 million and $10,385 million ⁶. THE RORT’s subtraction gives shortfalls of $7,772 million ($18,425 million less $10,653 million) and $3,019 million ($13,404 million less $10,385 million). These are the Bank’s whole interest account, all liabilities against all assets, not the ES balances alone, though the Bank calls those its main interest-bearing liability ⁷. It pays them a floating rate, against fixed low-yield assets bought in the pandemic ⁷.

Two things have moved the Bank’s balance sheet: valuation changes on its bonds and foreign exchange holdings, and the gap between what it pays on its liabilities and what it earns ¹². In 2021/22, when its whole interest bill was $411 million, it recorded an accounting loss of $36.7 billion, which included $44.5 billion of unrealised valuation losses, and negative equity of $12.4 billion at 30 June 2022. On an amortised cost basis, which many peers use, the Bank estimates its 2021/22 bond return at about $3 billion ¹². In 2022/23 the loss was $6 billion, with underlying earnings of negative $4.6 billion because the Bank ‘currently pays a higher interest rate on ES balances than it earns on its portfolio of assets’, and negative equity was $17.7 billion ¹². In 2023/24 the loss was $4.2 billion, underlying earnings negative $8.3 billion, negative equity $20.4 billion and accumulated losses $34 billion ¹². In 2024/25 the Bank recorded an accounting profit of $11.0 billion, with underlying earnings of negative $3.7 billion and valuation gains of $14.7 billion; negative equity was $5.3 billion and accumulated losses $34.7 billion ¹².

On the Bank’s account, valuation losses on bonds held to maturity reverse when they mature: ‘Given the intention to hold these bonds to maturity, any valuation losses that occur as yields increase will be offset at the time that the bonds mature at their face value’ ¹².

In July 2022 the Board considered a capital injection from the government and rejected it. ‘It concluded that a capital injection was not necessary, as the Bank’s capital can be restored over time through the retention of future earnings’ ¹². The Treasurer endorsed that, has supported the Board’s judgement each year since, and in 2025 agreed with the Governance Board’s judgement ‘that the negative equity position does not affect the RBA’s ability to operate effectively or perform its functions’ ¹². In 2024 the Bank said a return to its reserve fund target ‘is not expected for a further decade or so’ ¹².

So the losses have fallen on the Bank’s own capital, on the public balance sheet, which the Bank says can be restored over time from its own retained earnings, without an injection from the government ¹².

06The other side

The Bank’s answer to the charge is in the same review, and in the same passage that describes the payment. It is the Bank’s claim, and THE RORT reports it as the Bank’s.

once the cash rate increased, the RBA was paying banks more interest for the balances that they kept at the RBA than the low fixed rate the banks were paying on the TFF. Because the banks passed these lower funding costs in full, household and business borrowers who had locked in low fixed rates were the ultimate beneficiaries as interest rates rose.

The Bank’s table for February 2020 to February 2022 shows what fell on outstanding loans, in basis points: the cash rate target fell 65; the major banks’ funding costs fell 84; overall mortgage rates fell 97 (variable 68, fixed 152); business lending rates fell 105 (variable 103, fixed 89) ¹⁰. Over that period, in other words, rates on outstanding mortgages fell by more than the cash rate. The Bank also says its staff estimate that the indirect effects of the facility lowered yields on residential mortgage-backed securities (RMBS) by ‘around 50 basis points’, while the review’s own caveat is that the facility’s share of these lower wholesale funding costs, for lenders and corporations with no access to it, is ‘hard to identify’ ¹⁰. Its own lesson is that the fixed rate ‘lacked flexibility’ and incurred ‘a material financial cost to the RBA’ when the recovery and the pick-up in inflation turned out to be much stronger, and to start much earlier, than expected ¹⁰.

The bond purchase program has its own defence. The Bank estimated that it ‘lowered Australian Government bond yields by around 30 basis points’ and, with other measures, contributed to a strong recovery and a sharp drop in unemployment, while cautioning that ‘it is very difficult to isolate the specific effect of the BPP on the economy’ ¹¹.

The payment itself is part of the machinery of the cash rate: the ES rate is the floor of the corridor ². It goes to all ES account holders, and the Bank does not publish it by institution ⁶. And the cost has fallen on the Bank’s own capital, which the Bank says can be restored over time from its own retained earnings; the Treasurer has agreed that negative equity does not affect its ability to operate ¹².

What the published record does not show: how the interest divides between institutions, the interest bill for 2025/26, and the ES rate in force from 30 September. None of them is published. Questions on the ES rate, its 2025/26 cost and the Term Funding Facility extension are published in The grill, in this series (G12 and G13); answers will be added as they arrive.

If it’s a rort, we cover it.