Australia central bank to shift to ample reserve system to set rates

Australia's central bank intends to change the way it provides liquidity to the banking system, moving to one that provides ample liquidity through regular money market operations.

In a speech on the plumbing of monetary policy, Reserve Bank of Australia, or RBA, Assistant Governor Christopher Kent said the central bank would end its current system of setting a floor for rates with excess reserves and an exchange settlement, or ES, rate.

Instead, it will shift over time to a system of ample reserves in which banks' demands for reserves are satisfied via open market repo operations at a price near the cash rate target, in what are known as full allotment auctions.

"Under the ample reserves system, the supply of reserves can rise and fall in line with changes in demand, with minimal effects on the cash rate and other money market rates," Kent said.

The RBA flooded the financial system with cash during the pandemic and those reserves held by banks are slowly dwindling as emergency loans are repaid to the central bank.

The new system will reduce the risk of unnecessary volatility or disruption to conditions in money markets as reserves decline, Kent said.

It was also more resilient to any future expansion in the RBA's balance sheet if, for example, there was a need to address extreme stresses affecting bond markets, such as at the onset of the pandemic.

"With the supply of reserves just sufficient to satisfy underlying demand, the RBA's balance sheet will be no larger than it needs to be in order to implement monetary policy, and our footprint in financial markets will be smaller than in an excess reserves system," said Kent.

Reserves would be supplied through regular repurchase agreements, while the RBA could also purchase