Australia
Australia[AU$]
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. To achieve these objectives, the RBA has an 'inflation target' and seeks to keep consumer price inflation in the economy to 2-3 per cent, on average, over time.
To implement its monetary policy objectives, the RBA sets a target for the cash rate, the interest rate on overnight unsecured loans between banks. The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.
The cash rate target is determined by the RBA Board, which meets on the first Tuesday of each calendar month, except January. The Board's monetary policy decision is announced in a media release which is distributed through market data services and published on the RBA's website at 2.30 pm on the day of each Board meeting. Any change to the cash rate target is effective the following day. The RBA's domestic market operations are designed to ensure that the actual cash rate remains close to the cash rate target.
Key features of the monetary policy implementation framework
On a day-to-day basis, the cash rate is determined by the supply and demand for exchange settlement (ES) funds. Banks (and a small number of other financial institutions) hold ES funds in their accounts at the RBA to meet their payment obligations. Every day, and during the course of the day, banks must maintain a positive balance of ES funds. The RBA does not operate a reserves averaging framework or use reserves maintenance periods.
While the RBA does not require banks to hold a pre-specified amount of ES funds (eg minimum reserves), some banks maintain a certain amount of ES funds as a buffer against payments that settle after the interbank market has officially closed. These buffers are agreed in advance with the RBA and funds held for this purpose are remunerated at the cash rate target (this is discussed below under the standing facilities).
To maintain incentives for banks to trade their ES balances in the interbank market, the RBA operates an interest rate corridor. Overnight ES funds held by banks are remunerated 25 basis points below the cash rate. Where banks require use of RBA overnight repo, a margin of 25 basis points over the cash rate applies. Banks are not expected to make frequent use of the overnight lending facility and instead source funds in the interbank market.
To ensure that the cash rate trades closely to the cash rate target, the RBA gauges the demand for ES funds and conducts open market operations (OMOs) almost every day to keep the supply of ES funds at the right level. This is because transactions between the RBA (and its customers) and banks (and their customers) change the supply of ES funds. As the Australian Government is a customer of the RBA, these gross flows can be very large. In deciding when and how much to transact in its OMOs, the RBA seeks to offset the impact of all its other payment obligations and those of its clients. This liquidity forecasting and management helps the RBA maintain the supply of ES funds at the appropriate level.
Each morning, the RBA announces its OMO dealing intentions, inviting eligible counterparties to submit approaches. OMOs are conducted as fixed amount, variable repo rate tenders, with pre-specified terms that suit the RBA's liquidity management (generally between 1-week and up to 6-months).
There is no limit on the size or number of approaches a counterparty can make (counterparties with multiple approaches can set an aggregate limit). Where successful, counterparties must collateralise their transactions by selling highly rated debt securities to the RBA either under repo or outright sale (only short-term Australian government securities can be sold outright). More information on the RBA's collateral framework can be found in The Reserve Bank's Collateral Framework - December Quarter 2017. Eligible OMO counterparties include banks with ES accounts, but also other financial institutions that are not ES account holders. The RBA publishes counterparty eligibility rules on its website, see Eligible Counterparties.
At 5.10 pm each afternoon, the RBA announces whether an additional OMO is required, for example in the case where liquidity forecast errors result in the amount of aggregate ES funds being to large or too small, thus potentially disrupting orderly trading conditions in the interbank market. To prevent such an outcome, the RBA conducts additional OMOs to either drain or replenish aggregate ES funds, giving banks the opportunity, respectively, to lend undesired funds to the RBA or borrow required funds, on a secured basis. The RBA assesses the need for these additional rounds on a system-wide basis, not on the position of individual ES account holders, thereby preserving the incentives for banks to participate in the interbank market. Detailed information on OMOs is available on the RBA website, see Open Market Operations.
To fine-tune its liquidity management, the RBA also uses foreign exchange (FX) swaps in its domestic market operations. Unlike OMOs which are contracted for same-day value of funds, FX swaps are contracted for deferred settlement (generally T+1 to T+3) with maximum terms of up to 3-months. FX swaps are contracted bilaterally with pre-approved counterparties. FX swaps supplement the range of financial instruments used by the RBA to manage Australian dollar liquidity and are particularly useful to offset lumpy liquidity flows, such as the maturity of Australian Government Securities, or large Government flows (taxes and outlays).
Separate to OMOs which support the implementation of monetary policy, the RBA also provides standing facilities (SFs) to eligible counterparties, which include mostly ES account holders. SFs are designed to support the smooth functioning of the payments system. Banks access SFs by contracting repos against high-quality collateral. The RBA specifies in advance the price and terms of repos used in its SFs. Intraday repos are free of charge and allow banks to raise ES funds in order to make payments ahead of receiving covering funds later in the day. This smooths the volume of payments settlements throughout the day, avoiding gridlock in the payments system. If a bank fails to unwind an intraday repo, the RBA provides overnight repos, applying a margin of 25 basis points over the cash rate as a disincentive to use the facility. As mentioned above, banks are expected to source funds in the interbank market and not make frequent use of overnight repos.
Banks can also have open repo arrangements, ie repos without a specified maturity date. Open repos allow banks to hold a certain amount of ES funds that can be used to settle payments that occur outside of normal business hours. These arrangements support the trend for 24/7 payments as payments systems become more sophisticated and real-time. In Australia, examples of such 24/7 payments include those made under the New Payments Platform - infrastructure that enables Australian consumers, businesses and Government agencies to make real-time payments between accounts at participating banks. NPP payments are settled across banks' ES accounts via the RBA's Fast Settlement System.
Institutional setup of monetary policy decisions and operations
Policy decision body, size and composition | Reserve Bank Board by consensus. |
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Major mandates | 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; cash rate |
Overview of key features
Key policy rate | Target cash rate |
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maturity (days) | 1 |
Operating target | Unsecured interbank cash rate |
maturity (days) | 1 |
Standing facilities | Lending, deposit |
Corridor width (bp) | 50 |
Reserve requirements | Yes |
maintenance period | Daily |
Main operation | Repo / reverse repo |
functions | Liquidity injection / withdrawal |
maturity (days) | Liquidity injection / withdrawal |
regular interval | Liquidity injection / withdrawal |
frequency | Liquidity injection / withdrawal |
Overall frequency | ≥1 x d |
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 | No |
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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 | As part of the quarterly Statement on Monetary Policy. |
Publication of projected path of policy rate | No |
Reserve requirements: ratios and size
Main functions served | Support functioning of payments system after business hours |
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Domestic currency | Yes |
Foreign currency | No |
Average | N/A |
Required reserves | AUD 26 bn |
Required reserve as % of GDP | 1.4% |
Actual reserves | AUD 28 bn |
Actual reserve as % of GDP | 1.5% |
Main features of reserve requirements
Averaging | N |
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Carry-over | N |
Type | N/A |
Maintenance period | Daily |
end (day) | Daily |
Calculation period | N/A |
end (day) | N/A |
Lag before maintenance | N/A |
Vault cash | N |
restrictions | N/A |
Remuneration | Y |
average rate | Target cash rate |
marginal rate | Target cash rate |
Framework last changed | 11/13 |
Liquidity position and forecasting
Structural Position | Deficit |
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Most volatile factor(s) | Tax |
Most unpredictable factor(s) | Tax, Government outlays |
Forecast horizon(s) | 1 year |
Frequency | Daily |
Frequency of revision | Daily |
Forecast published? | Yes |
Standing facilities: lending / market ceiling
Name | Overnight repo |
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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 |
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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 | RP and RRP |
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Maturity | Up to 1 year; typically around 1 month |
Frequency | At least daily |
Pricing method | Auction |
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 |
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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 |
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Frequency | Several times per month |
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 | OT purchases of government bonds |
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Form | |
Frequency | As needed |
Maturity | Maturity of the bond purchased |
Pricing Method | Based on market conditions |
Access limited by/to | RBA eligible counterparties |
Function(s) | Purchases are conducted ahead of large government bond maturities to manage liquidity on the maturity date |
Settlement systems and intra-day liquidity facilities
Settlement system | RTGS, since 1998 |
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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 |
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 short-term debt and long-term debt (subject to a minimum credit rating) issued by authorised deposit-taking institutions is eligible. Full list available at: http://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-securities.html |
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Standing facilities: Discretion of central bank on collateral | 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 short-term debt and long-term debt (subject to a minimum credit rating) issued by authorised deposit-taking institutions 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 | Complete discretion |
Dissemination of operational information: liquidity forecast
Forecast published? | Yes |
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Channel(s) | Reuters, Bloomberg, |
Timing | Shortly before operations |
Remarks | Forecast for current day only RBA website in Statistical Table A3 after operations |
Dissemination of operational information: open market operations
Volume and price published? | Yes |
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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 |
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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 |
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Channel(s) | Website |
Timing | (i) Annual (ii) ad hoc (iii) ad hoc |