Monetary Policy Board – Policy on Financial Market Intervention to Address Market Dysfunction May 2025

1. Purpose and scope

Well-functioning financial markets are a pre-condition for achieving the Monetary Policy Board’s (‘the Board’) objective of a stable Australian financial system, as well as for the effective implementation of the Board’s monetary policy decisions. For this reason, the Board considers that it may be necessary, in exceptional circumstances, for the Bank to intervene directly in key financial markets to address dysfunction that poses a risk to its financial stability objective. Such interventions would not be intended to alter the stance of monetary policy and are distinct from the Bank’s transactions in financial markets aimed at implementing the Board’s monetary policy decisions.

Much of the time, the Bank is able to support normal market functioning by providing liquidity to money markets through its normal operations in repo, foreign exchange (FX) swaps and/or purchases of very short-dated Australian Government securities. Where that functioning becomes more challenged, the Bank may expand and/or alter these operations as needed. Addressing such emerging challenges to market functioning helps avoid the emergence of more serious, system-wide instability.

However, in extreme cases, such operations may not be sufficient if conditions of genuine dysfunction emerge in markets that are critical to financial stability. In these rare circumstances, it may be necessary for the Bank to intervene in other financial markets. This policy establishes the circumstances in which the Board has determined it is appropriate for the Bank to intervene directly (that is, buy or sell assets) in two specific financial markets – namely, the spot FX market for the Australian dollar or markets for bonds issued by Australian governments – to achieve its financial stability objective. Such situations are expected to be rare.

This policy does not:

relate to purchases or sales of assets intended to alter the stance of monetary policy materially and persistently
authorise intervention in other circumstances or markets.

This policy replaces any prior Board policy in respect of the same subject matter but it does not affect any existing Board delegation to the Governor or Deputy Governor. It also operates alongside the general principle that the Governor should err on the side of consulting the Board where there is uncertainty about whether a particular action involves determining, rather than implementing, policy.

2. General principles

2.1 Circumstances warranting market intervention

Intervention in the two specific markets listed above may be undertaken where the Governor, Deputy Governor (if applicable) or Bank staff under delegation from the Governor judge that all of the following conditions are met:

markets are displaying signs of substantial illiquidity and/or there are sharp changes in prices that do not appear to be explained by economic news and other market forces. This would be determined with reference to a range of indicators and information, such as (but not limited to) bid-ask spreads, measures of market depth, yield curve fitting errors, turnover and/or market intelligence
there is a reasonable expectation that the need for intervention is temporary (indicatively, not more than a couple of weeks)
intervention is necessary to mitigate a risk to the stability of Australia’s financial system that is assessed to be unacceptably high, and purchases or sales of assets are being considered because other options or tools are judged to be inappropriate or unlikely to be sufficient to address the risk to financial stability.

2.2 Features of any market intervention

If intervention is judged to be warranted based on the considerations in Section 2.1, any intervention which is undertaken should be:

temporary – the Bank should stop intervening once the Governor, Deputy Governor (if applicable) or delegate judge that the conditions specified in Section 2.1 are no longer present (and are unlikely to re-emerge when the Bank stops intervening)
targeted – the Bank should undertake no more transactions than is considered necessary to achieve the policy objective, and should purchase only those particular assets (within the class permitted under this policy) that it believes are necessary to achieve the policy objective
mindful of risk – staff must identify, evaluate and manage the risks and potential mitigating actions that arise when implementing and exiting the intervention. To the extent possible, this assessment should be based on assessments of the potential risks and mitigation actions, under a range of scenarios, developed pre-emptively as part of a toolkit for market intervention. Any intervention should involve only as much risk as is deemed necessary to achieve the policy objectives
unwound in a timely way – once the need for intervention has passed, subject to appropriate management of the potential policy and financial risks associated with exit.

When entering into or conducting any interventions under this policy, the Bank should also be mindful of the potential implications for other public agencies and financial market participants. It should consult with the Australian Office of Financial Management (AOFM) and/or relevant state and territory issuing authorities before undertaking any purchases in bond markets. It should also inform agencies representing the Council of Financial Regulators of its interventions.

Any purchases of domestic government bonds would occur only in the secondary market.

3. Interaction between staff and the Board

The Board’s legislative function of determining the policies of the Bank for contributing to the stability of the Australian financial system means that it is ultimately accountable for any intervention that the Bank conducts under this policy. It also has the power to instruct staff to intervene when it deems that appropriate to achieve the Board’s objectives. However, responsibility for implementing this policy – that is, conducting the intervention and/or initiating it when the criteria in Section 2.1 are met – resides with the Governor (or Deputy Governor, if applicable).

Given the Board’s accountability for any interventions under this policy, its expectation is that:

the Governor (or Deputy Governor, if applicable) will take reasonable steps to alert the Board when intervention under this policy begins to be contemplated as a plausible option following a deterioration in market conditions, acknowledging that on rare occasions, conditions may develop too rapidly for the Board to be contacted before intervention itself begins
once an intervention under this policy is initiated by staff, the Board should be convened in a timely way. At that time, the Board should be briefed on the market situation that justified the intervention, the nature of the intervention that has already occurred and considerations relevant to any ongoing intervention and possible exit scenarios
the Governor (or Deputy Governor, if applicable) will provide the Board with regular updates thereafter, until the time that any intervention ends. These updates should provide the Board with sufficient information to enable members to understand the need for ongoing intervention and/or discuss potential exit strategies as members desire.

4. Authority of the Deputy Governor

The Deputy Governor may make the judgments specified in section 2 of this policy, and is responsible for the implementation of this policy and the provision of information to the Board as specified in section 3 of this policy, if:

the Governor is incapacitated through illness, injury or similar condition or is not contactable within a particular timeframe and
the Deputy Governor judges that a failure to make a judgment (or do any other thing in implementation of this policy) within that timeframe would significantly impair the ability of the Bank to achieve the Board’s monetary policy or financial stability objectives.

5. Interaction with the Governance Board

While the Bank’s policy on intervention in financial markets is reserved for the Monetary Policy Board, the Governance Board will have an interest in both this policy and any market intervention undertaken by the Bank pursuant to it (given the implications for financial and non-financial risks). In recognition of that, and consistent with the Memorandum of Understanding (MoU) among the Bank’s boards, a copy of this policy will be provided to the Governance Board and any decisions to intervene in financial markets under or in connection with this policy should be taken in a manner that is consistent with the principles set out in the MoU. This includes having regard to any relevant framework, policy or risk appetite that has been established by the Governance Board, and staff adhering to these (insofar as it is possible to do so without preventing or impairing the implementation of this policy or acting contrary to any specific direction of the Board). It also includes appropriately informing the Governance Board.

6. Public communication

Any intervention under this policy must be accompanied by a well-considered communication plan. In some cases, that plan will not include announcing the Bank’s intervention but will, at a minimum, include how the Bank intends to respond if the intervention is identified by financial market participants or the media. In other cases, public communication may be an important vehicle through which the policy objectives can be achieved.

Any public statements should clearly communicate that the purpose of the intervention is to contribute to the stability of the Australian financial system, not to alter the stance of monetary policy from where the Board last set it. Any communication of bond market interventions should also clearly convey that the Bank will seek to unwind any purchases in a timely way after bond markets return to reasonable functioning.