Australia Rates Viewpoint: Bank funding gap to narrow as mortgage lending slows

Research evidence excerpt

Australia Rates Viewpoint: Bank funding gap to narrow as mortgage lending slows

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Australia Rates Viewpoint

Bank funding gap to narrow as mortgage

lending slows

Key takeaways 10 June 2026

Rates Strategy• We estimate the bank funding gap to decline around 14% over the next 12 months as

Australia

tax changes lead to slower credit growth.

• We see tighter 6s3s and BOB spreads, and expect demand for HQLA to slow. Strategy

Isabel Hartstein

• We recommend receiving 6m6m AONIA/SOFR (entry 11.3bp, target 4bp, stop 15bp). FX & Rates Strategist

Merrill Lynch (Australia)

isabel.hartstein@bofa.com

Credit growth and bank funding expected to slow OliverFX and LevingstonRates Strategist

Changes to capital gains tax and negative gearing are expected to materially slow Merrill Lynch (Hong Kong)

oliver.levingston@bofa.com

investor mortgage lending. As credit demand softens, banks’ funding needs are also set

Equity Research

to decline. We estimate that the bank funding gap could decline 14% to around AUD1trn, Matt Dunger >>

by June 2027, reflecting both weaker credit demand and the recent strength in deposit Research Analyst

growth, which we expect to continue. matthew.dunger@bofa.com

Exhibit 1: Core funding gap is expected to decline alongside slower mortgage lending

Funding gap estimate vs short and long-term borrowing (AUDbn) For a list of open and closed trades

1300 over the past 12 months, see the funding gap most recent Global Rates Weekly.

short and long-term borrowing

forecast

900 HQLA: High‑Quality Liquid Assets

700 BOB: Bank Bill–OIS Basis

2019 2020 2021 2022 2023 2024 2025 2026 2027

AONIA: Australian Overnight Index

Source: APRA, BofA Global Research Average

BofA GLOBAL RESEARCH

6s3s to trade tighter, demand for HQLA to ease SOFR: Secured Overnight Financing