Market Operations
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.
Conventionally, an important aspect of implementing policy decisions involves the Reserve Bank transacting in domestic financial markets in its open market operations to keep the operational target for monetary 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 Bank is able to control the supply of funds in this market through transactions, affecting both the cash rate and liquidity provision to the financial system.
During 2020, the Reserve Bank introduced a comprehensive package of additional policy measures to address COVID-19-related pressures on the Australian economy. These measures resulted in some important changes to domestic market operations including:
- a significant increase in liquidity in the banking system has moved the cash rate to the low end of 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 the yield curve than the cash rate (initially the AGS closest to three years to maturity) – the yield target was discontinued on 2 November 2021;
- lower government bond yields further out along the yield curve than the target bond and so lower the whole structure of interest rates – on 1 February 2022 it was announced that further purchases under the bond purchase program would cease after 10 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 – which ended on 30 June 2021 – banks could access new low-cost three-year funding. See Term Funding Facility. This was in addition to a number of liquidity facilities that are principally used to provide financial institutions with funding to manage their (and their customer's) payments activity.
The Reserve Bank also undertakes transactions in the foreign exchange market on a regular basis. Many of these transactions arise out of the provision of foreign exchange services to clients, with the Australian Government the Bank's largest client. The Reserve Bank manages Australian dollar liquidity through foreign exchange swaps as necessary. Transactions are also undertaken in the foreign exchange market, as well as foreign asset markets, in managing Australia's foreign currency 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 managed against benchmark targets. Foreign currency reserves are deployed from time to time to effect policy operations in the foreign exchange and domestic cash markets.