About Market Operations
Domestic Market Operations
Domestic market operations, also known as open market operations, are transactions that the Reserve Bank undertakes in financial markets to ensure that the operational target for monetary policy – the cash rate – remains close to the target rate set by the Reserve Bank Board. The cash rate is the interest rate on unsecured overnight loans between banks. Transactions are also undertaken to manage the financial risk of the Bank’s balance sheet.
On a day-to-day basis, deviations in the cash rate around the target are determined by the supply of and demand for exchange settlement (ES) balances. These are funds held in accounts at the Reserve Bank by banks as well as a number of other institutions, and are used by these account holders to meet their settlement obligations to each other and to the Bank. If the supply is too high, holders of ES balances will wish to lend their excess funds in the overnight market, putting downward pressure on the cash rate. If the supply is too low, they will wish to borrow, putting upward pressure on the rate.
Open market operations are undertaken on almost every business day. If ES balances are expected to fall in the absence of market operations, the Reserve Bank would typically announce an intention to buy securities either outright or under a repurchase agreement (see below). When the Bank buys securities, it pays for them by crediting the seller’s ES account, adding to ES balances. If ES balances are expected to rise in the absence of market operations, the Bank would normally sell securities to reduce ES balances. Sales of securities by the Bank reduce ES balances as buyers pay for the securities from their ES accounts.
The Reserve Bank undertakes both repurchase agreements and outright purchases and sales of securities in its open market operations. The securities against which the Bank is prepared to undertake repurchase agreements or buy or sell are limited to highly-rated Australian dollar denominated securities. On occasion the Bank will also undertake foreign exchange swaps – with the Australian dollar as one leg of the transaction – to manage system liquidity.
In addition to carrying out open market operations, the Reserve Bank also operates a number of facilities that support the efficient functioning of the domestic financial markets and payment system. These include the intraday liquidity facility, overnight liquidity facility and the AOFM securities lending facility. On occasion, the Bank also makes use of term deposits and has operated a US dollar swap facility.
International Market Operations
The Reserve Bank operates in the foreign exchange market from time to time to mitigate disorderly market conditions or address overshooting in the value of the Australian dollar. These activities are commonly known as foreign exchange intervention. The Bank also operates in the foreign exchange market to meet the demands of its clients for foreign exchange. The most important of these clients is the Australian Government.
Management of Foreign Currency Reserves
The Reserve Bank undertakes transactions in the foreign exchange market and in foreign asset markets as part of its responsibility for the management of Australia's international reserves. These reserves are held on the balance sheet of the Bank and are deployed to facilitate policy operations in the foreign exchange and domestic cash markets.