SYDNEY, Aug 25 (Reuters) – Australia’s central bank said on Tuesday reserves in the financial system were still above underlying demand as it shifts to a new system that will provide enough liquidity to banks while keeping rates anchored near the official cash rate.
In a speech on the ample reserves policy, Reserve Bank of Australia (RBA) Head of Domestic Markets David Jacobs said reserves have fallen by more than half since 2022 as the assets the central bank acquired under pandemic-era policies have matured, and that will continue.
However, funds can still be sourced cheaply in short-term repo markets and the use of the full-allotment open market operations under the new system is still modest, he added.
“Taken together, those indicators suggest that we’re not yet in an environment where the level of reserves is driven by demand,” said Jacobs.
“When we might reach ample reserves ultimately remains highly uncertain. It could be some years away… But it could also be earlier if banks increase their demand or there are market frictions.”
The RBA said in 2024 that it would shift to a system of ample reserves to set interest rates, in which banks’ demands for reserves are satisfied via open market repo operations at a price near the cash rate target. That ended the old system of setting a floor for rates with excess reserves and an exchange settlement (ES) rate.
(Reporting by Stella Qiu and Wayne Cole; Editing by Christian Schmollinger and Muralikumar Anantharaman)
Comments