Australia

Australia[AUD]

Institutional framework

The RBA sets monetary policy with the objective of maintaining price stability, full employment, and contributing to the economic prosperity and welfare of the Australian people.

Prior to 19 March 2020, the Reserve Bank Board's sole operational target for monetary policy was the cash rate – the rate at which banks borrow and lend to each other on an overnight, unsecured basis. The package of policy measures announced by the Board in response to the economic and financial disruption caused by the COVID-19 pandemic introduced a number of other operational targets, including a target for the 3-year Australian Government bond yield, and a target quantity of purchases of longer-term government bonds. However, the cash rate target remains a key element of the monetary policy framework. The package of policy measures has substantially increased the amount of liquidity in the banking system, with the result that the cash rate has traded below the cash rate target and activity in the cash market has been subdued. This was as expected.

Key features of the monetary policy implementation framework

The Reserve Bank undertakes transactions in domestic financial markets to implement the policy decisions of the Reserve Bank Board and facilitate the smooth functioning of the payments system. Historically, this has principally involved the Reserve Bank transacting in domestic financial markets in its open market operations (OMO) to keep the cash rate consistent with the cash rate target set by the Reserve Bank Board. A key class of transaction that the Bank has historically used to achieve this has been repos contracted as part of its regular morning OMO. On occasion, further rounds of market operations were also conducted in the late afternoon if required to ensure the amount of surplus Exchange Settlement (ES) balances (that is, balances held by banks and a small number of financial institutions at the Reserve Bank) was consistent with the cash rate trading at target. Repos involve the purchase of high-quality collateral securities where the Bank acquires the securities for a period of time in return for providing cash (i.e. funds deposited into an ES account). As a result, there is very little risk of the Bank suffering financial loss. The securities accepted by the Bank include securities issued by the Australian Government, the Australian states and territories, and certain approved international sovereign and supranational issuers. Securities issued by banks, asset-backed securities and corporate bonds that meet certain criteria are also eligible for repo in the Reserve Bank's OMO. Foreign exchange (FX) swaps are another type of transaction that the Bank has used to manage system liquidity; swapping Australian dollars for foreign currencies increases the supply of ES balances in the same way as a repo transaction.

Since March 2020 the large increase in surplus ES balances has meant that the cash rate has traded close to the rate paid on surplus ES balances, rather than at the cash rate target. This was expected and the Reserve Bank has ceased targeting a level of surplus ES balances consistent with the cash rate trading at the target. As a result, FX swaps and afternoon rounds of market operations have not been needed for domestic liquidity management purposes. The Reserve Bank has continued to conduct regular morning OMO, but no longer uses these operations to fine-tune financial system liquidity; rather, the Reserve Bank has been providing liquidity through OMO to eligible counterparties at a fixed rate aligned to the cash rate target. Demand for funds at the Bank's regular morning OMO has declined as ES balances have increased.

In March 2020 the Reserve Bank Board announced a target for the three-year Australian Government bond yield of around 0.25 per cent, which was subsequently lowered to around 0.10 per cent in November 2020. The three-year target bond was the Australian Government bond with maturity closest to three years. In July 2021 the Board fixed the target bond as the April 2024 bond, rather than extending to the November 2024 bond; that is, the tenor of the target will decline until it expires in April 2024. The Bank is prepared to purchase government bonds as necessary to support the target. As also announced in March 2020, the Bank is also willing to purchase government bonds as needed to address market dysfunction.

The Reserve Bank commenced purchases of government bonds under the bond purchase program on 5 November 2020. Purchases were conducted at a pace of $5 billion per week through to September 2021; although public holidays and a break over the 2020/21 Christmas and New Year period resulted in fewer purchases in some weeks. Starting from September 2021, purchases were conducted at a pace of $4 billion per week, with the pace of purchases subject to regular review by the Board. Purchases are conducted via competitive auction, and are for bonds of around 5 to 10 years residual maturity.

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Reserve Bank Board by consensus. 1
Major mandates 2 Contribute to price stability, full employment, and the economic prosperity and welfare of the Australian people (Reserve Bank Act). Implemented through achievement of inflation target (re-affirmed in joint statements between the Treasurer and the Governor).
Decision-making process Consensus
Frequency / length of meetings Monthly (except January)
Frequency of announcements Same
Main policy target Target range of 2–3% CPI inflation, on average, over time

Overview of key features

Key policy rate Target cash rate
maturity (days) 1 day
Operating target Unsecured interbank cash rate
maturity (days) 1 day
Standing facilities Deposit, lending
Corridor width (bp) [target -10, target +25] = 35 bps
Reserve requirements Yes
maintenance period Daily
Main operation 3 RP (liquidity injection) / outright purchases
functions Liquidity management. Drain liquidity.
maturity (days) Typically 4 weeks or less, although longer terms may be offered if warranted by market conditions
regular interval Yes
frequency 1 x w
Overall frequency 1 x w
Discretion left to operational desk Use of instruments within authorisation, size and timing of operations
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance When the Board considers appropriate
Timing / media of policy announcement Yes. 2.30 pm on day of board meeting; central bank website and Reuters and Bloomberg.
Policy announcement and documents Target cash rate
Explaining policy decisions Detailed press release/media statement
Dissemination of minutes (timing / media) Yes. Published two weeks after board meeting.
Content of minutes Description of economic and financial conditions and the policy consideration.
Publication of forecasts 4 As part of the quarterly Statement on Monetary Policy.
Publication of projected path of policy rate 5 No

Reserve requirements: ratios and size

Main functions served Support functioning of payments system after business hours
Domestic currency Yes 6
Foreign currency No
Average N/A 7
Required reserves AUD 24 bn
Required reserve as % of GDP 1.2%
Actual reserves AUD 400-450 bn
Actual reserve as % of GDP 19-22%

Main features of reserve requirements

Averaging N
Carry-over N
Type N/A 8
Maintenance period Daily
end (day) Daily
Calculation period N/A 9
end (day) N/A 10
Lag before maintenance N/A 11
Vault cash N
restrictions N/A
Remuneration Y
average rate Floor of corridor 12
marginal rate Floor of corridor 13
Framework last changed 9/21 14

Liquidity position and forecasting

Structural Position Deficit 15
Most volatile factor(s) Tax, Government financing
Most unpredictable factor(s) Tax, Government outlays
Forecast horizon(s) 1 year 16
Frequency Daily
Frequency of revision Daily
Forecast published? No

Standing facilities: lending / market ceiling

Name Overnight repo
Form Reverse repo (=RP)
Pricing method Fixed margin above target cash rate
Maturity O/N
Access limited by/to Collateral holders of Exchange Settlement Accounts
Function(s) Marginal liquidity accommodation; limit interest rate volatility; provides liquidity insurance (where usage via Committed Liquidity Facility)

Standing facilities: deposit / market floor

Name Exchange Settlement Account rate
Form Deposit
Pricing method Fixed margin below target cash rate
Maturity O/N
Access limited by/to Exchange settlement account eligibility
Function(s) Depository for surplus cash reserves; Limit interest rate volatility; facilitate settlements

Open market operations: repo or reverse repo

Name/Type 17 RP and RRP
Maturity Typically 4 weeks or less, although longer terms may be offered if warranted by market conditions
Frequency Weekly
Pricing method Fixed rate 18
Access limited by/to Most members of Reserve Bank’s RTGS system
Function(s) Liquidity injection and withdrawal

Open market operations: central bank bills

Name N/A
Total issuance N/A
Maturity N/A
Restrictions on possible maturities N/A
Pricing method N/A
Access limited by/to N/A
Discretion left to operational desk N/A

Open market operations: FX swaps

Maturity Up to 3 months
Frequency Not currently in use 19
Pricing method Bilateral with counter parties
Access limited by/to FX counterparty panel
Function(s) Liquidity injection & withdrawal

Other significant liquidity management means

Name/Type 20 OT purchases of government bonds
Form As part of OMO/over-the-counter
Frequency As required
Maturity Maturity of the bond purchased
Pricing Method Against a hurdle rate
Access limited by/to RBA eligible counterparties
Function(s) To manage liquidity ahead of large government bond maturities

Settlement systems and intra-day liquidity facilities

Settlement system RTGS, since 1998
Intra-day liquidity facility Intra-day repo
Charge No charge for repo operations
Foreign currency settlement system No
CLS participation by banks Yes
Other settlement system(s) Yes 21

Collateral

Standing facilities: List of eligible collateral AAA-rated AUD long-term debt securities (including asset-backed) issued in Australia (can apply to use self-securitised asset-backed securities in standing facilities only). Additionally, all AUD short-term debt and long-term debt (subject to a minimum credit rating) issued by authorised deposit-taking institutions or other corporations is eligible. Full list available at: http://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-securities.html
Standing facilities: Discretion of central bank on collateral 22 Complete discretion, subject to notice periods under Committed Liquidity Facility
Open market operations: List of eligible collateral AAA-rated AUD long-term debt securities (including asset-backed) issued in Australia. Additionally, all AUD short-term debt and long-term debt (subject to a minimum credit rating) issued by authorised deposit-taking institutions or other corporations is eligible. Full list available at: http://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-securities.html
Open market operations: Discretion of central bank on collateral 23 Complete discretion

Dissemination of operational information: liquidity forecast

Forecast published? No
Channel(s) Reuters, Bloomberg
Timing Shortly before operations
Remarks RBA website in Statistical Table A3 after operations

Dissemination of operational information: open market operations

Volume and price published? Yes
Channel(s) Reuters, Bloomberg, Website
Timing On Reuters and Bloomberg at the conclusion of auction.
On website within two hours of operations (published at 11:30).

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) RBA Website and Annual Report
Lending facility usage: Timing Daily, published with three-calendar-month delay
Deposit facility usage: Channel(s) Reuters, Bloomberg, RBA website
Deposit facility usage: Timing Next day

Other information dissemination

Type (i) Annual report
(ii) speeches
(iii) research articles
Channel(s) Website
Timing (i) Annual
(ii) ad hoc
(iii) ad hoc

1 Consisting of the Governor, Deputy Governor, the Secretary of the Treasury (the "Government participant") and six other members. Each member has a vote. Of the six "other" members, five must not be officers of the RBA or the Australian Public service.

2 Describe as well the legal status of the mandate and involvement of government

3 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).

4 For instance, economic and inflation forecasts related to policy decision.

5 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.

6 The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a per cent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions.

7 The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a per cent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions.

8 The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a per cent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions.

9 The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a per cent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions.

10 The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a per cent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions.

11 The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a per cent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions.

12 Was previously at target cash rate. Moved to floor (ie same as remuneration on surplus ES balances when that rate was moved to zero)

13 Same as previous line.

14 Financial institutions no longer required to contract open repos with the RBA

15 Excess reserves are currently positive but structural flows deduct from liquidity position.

16 The Reserve Bank has system liquidity forecasts out to 1 year, based on Government budget forecasts, past outlays patterns and monthly profiles from the Australian Taxation Office.

17 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).

18 The fixed hurdle rate is the rate on term-matched overnight indexed swaps (OIS) plus a modest spread. Currently, this spread is around 5 basis points, but subject to change depending on market conditions.

19 The RBA offers to undertake outright transactions daily, but only transacts when attractive relative to repo. FX swaps are used to manage large, lumpy flows and to help manage the size of the domestic repo book. Currently not in use since in a situation of ample system liquidity.

20 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.

21 Cheques, Government direct entry and card based payments systems settle on a deferred net basis. Some changes were implemented to non-Government same-day DE on 25 November 2013, requiring the provision of Open RBA Repos. The settlement system for debt securities trades settles on an RTGS basis. The settlement system for equities settles on a deferred multilateral net basis (though an unused RTGS option exists).

22 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

23 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.