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.