In March 2024, the Reserve Bank Board endorsed a plan to move to operating with ample reserves for its future system for monetary policy implementation. Further details and any changes to market operations will be announced as required in due course. For more information, please see The Future System for Monetary Policy Implementationand Consultation Paper.
The Reserve Bank undertakes transactions in domestic financial markets to implement the policydecisions of the Reserve Bank Board and facilitate the smooth functioning of the paymentssystem.
Conventionally, an important aspect of implementing policy decisions involves the Reserve Bank transacting indomestic financial markets in its open market operations to keep the operational target formonetary policy – the cash rate – consistent with the target rate set by the Reserve Bank Board.The cash rate is the interest rate on unsecured overnight loans between banks. The Reserve Bankis able to control the supply of funds in this market through transactions, affecting both thecash rate and liquidity provision to the financial system.
During 2020, the Reserve Bank introduced a comprehensive package of additional policy measures toaddress COVID-19-related pressures on the Australian economy. These measures resulted in someimportant changes to domestic market operations including:
- a significant increase in liquidity in the banking system has moved the cash rate to the lowendof the corridor.
- purchases of government bonds in the secondary market, for a time, to:
- support a target for the yield on an Australian Government bond further out theyield curve than the cash rate (initially the AGS closest to three years tomaturity) – the yield target was discontinued on 2 November 2021;
- lower government bond yields further out along the yield curve than the targetbond and so lower the whole structure of interest rates – on 1 February 2022 it wasannounced that further purchases under the bond purchase program would cease after10 February 2022; and
- address market dislocations, which were most heightened around March 2020.
- A term funding facility for the banking system, through which for a specified period – whichendedon 30 June 2021 – banks could access new low-cost three-year funding. See Term FundingFacility.This was in addition to a number of liquidity facilities that are principally used to providefinancial institutions with funding to manage their (and their customer's) paymentsactivity.
The Reserve Bank also undertakes transactions in the foreign exchange market on a regular basis. Manyof these transactions arise out of the provision of foreign exchange services to clients, withthe Australian Government the Bank's largest client. The Reserve Bank manages Australian dollarliquidity through foreign exchange swaps as necessary. Transactions are also undertaken in theforeign exchange market, as well as foreign asset markets, in managing Australia's foreigncurrency reserves. Foreign currency reserve assets are held on the balance sheet of the Bank,with the currency allocation, asset allocation and interest rate risk on investments managedagainst benchmark targets. Foreign currency reserves are deployed from time to time to effectpolicy operations in the foreign exchange and domestic cash markets.
