Christopher Kent: The future system for monetary policy implementation

Speech by Mr Christopher Kent, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, at the Bloomberg Australia Briefing, Sydney, 2 April 2024. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

I'd like to start by thanking Bloomberg for hosting this event.

Today, I'll be speaking about the future system for monetary policy implementation – that is, the method by which the Reserve Bank of Australia (RBA) controls the cash rate. Planning for the future system is important given that the unwinding of unconventional monetary policies is leading to a decline in Exchange Settlement (ES) balances – otherwise known as reserves (Graph 1). Reserves held by banks in their ES accounts at the RBA play a central role in policy implementation. Banks use these funds to settle payments with other banks and with the RBA. They can also lend surplus funds to other banks in the overnight cash market. Those transactions go into the determination of the cash rate.

At its March meeting, the Reserve Bank Board considered three options for the future system for the implementation of monetary policy:

1. maintain the current 'floor' system with an excess of reserves;

2. return to a 'corridor' system with scarce reserves, as used prior to the pandemic; or

3. transition to a new system of ample reserves that lies somewhere between these two.