Report to the Inquiry into Competition in the Banking and Non-Banking Sectors Conclusion

The primary purpose of the Reserve Bank's open market operations is to ensure that the cash rate remains at, or close to, the target set by the Reserve Bank Board. That purpose is best served by maintaining flexibility in the Bank's portfolio through the use of short-term repos. In response to the financial market turbulence, the Reserve Bank has acted to support the functioning of financial markets including extending the maturities of repos. Over recent months, however, demand for longer-dated repos has moderated, and on a number of days when longer terms have been offered, no demand has been observed.

While it would be feasible for the Bank to offer longer terms in its dealing, and accept the commensurate increase in credit and interest rate risks on its portfolio, any significant extension in the maturities of repos means that it becomes more difficult for the Bank to cope with fluctuations in the demand for ES balances. This, in turn, would entail a higher risk of instability of the cash rate. Any actions the Bank could take in extending its market operations to significantly longer maturities are necessarily constrained by this primary objective and the size of its balance sheet.