Transcript of Question & Answer Session The Road to Ample – Towards a Demand-driven Liquidity Regime

In your remarks, Dave, there was a lot of focus on the RBA’s administered rates, specifically the OMO rate and the ES rate. What about the cash rate? Where does that fit under ample?

Sure. Well, the ultimate objective of this framework is keeping the cash rate close to the Board’s target. As I said, that’s exactly how monetary policy is implemented. It is the objective of what we’re trying to achieve here is to keep the cash rate close to target and for that to anchor other rates in the market. So in terms of where we are today the cash rate is back at the target, close to the target, so that’s good in that we’re achieving monetary control there, it’s all consistent with the target.

We’ve seen some improvement in activity. It’s now at the point where almost every day that’s a market-determined rate, which wasn’t the case a couple of years ago when there was a lot more liquidity in the system, there was a lot of expert judgment. So cash rate is near the target. It’s a market-determined rate. It’s not a great signal by itself of whether we’re at ample yet. We’re looking at a broader suite of indicators there, and activity in the market is still – hasn’t broadened out all that much yet, so it’s not suggesting that we’re at ample yet.

In terms of what we expect going forward, I think we expect – well, it’s more than likely that there will be some more activity in that market as reserves drain. So we should see more banks getting to their preferred level of reserve holdings, more distribution of liquidity around the system, and should see more happening in that market.

Now, it wouldn’t be surprising if we do see the cash rate moving around a bit. That’s a healthy thing. We have said this in the past. There’s a strong convention for the cash rate to trade at the previous day’s rate, or at the target, but it is actually a sign of a healthy market if you get a bit of movement around. If on the way there we see the cash rate moving around a bit, that’s not going to be of itself an issue and it could be a healthy thing.

The framework should be there to prevent anything that’s more substantial than that happening. If you saw pressure in that market, well, we’ve got our weekly operations where liquidity can come in, there’s the overnight facility available every day. They’re there to be used. That should keep – while we might see some movement, that should basically keep the market in balance. Now, if we find over time as we get closer – we’re still learning along the way – if we find we need to adjust things because the amount of movement in the market is beyond what we would want or it’s settling at a level that’s more persistently not consistent with the target, then we can make these other technical adjustments. They will be technical adjustments, they won’t be a change in monetary policy. We’re not planning on any of those today. It’s more to say if we need to then we can. So it’s still how the Board sets the target, as it always has, and we’ve got a system that can help us to achieve it.

Thank you. You mentioned in the speech that the use of alternative instruments to inject money into the system would not be based on trying to influence any prevailing market rate. You can imagine a scenario where intra month some key funding rates such as repo may be moving around with a volatility that is larger than the move of a cash rate increment of 25 basis points. Would it still remain true that you wouldn’t use alternative monetary policy instruments with an aim of trying to smooth out some of the volatility in that rate in such a situation?

Yes, it would. We will have a quantity in mind here that we’re trying to inject. Now, as I said, we wouldn’t want that to be an issue with our other monetary policy implementation objectives. That means we’ll be mindful of market pricing. If rates are very low then that does introduce financial risk for us. It might mean as we transact that it’s not helpful for the normal transmission to other market rates, and it’s also when rates are very low that that’s a signal that that part of the market has got quite a bit of liquidity at that time. So we’ll have a quantity in mind, and we wouldn’t want that to create issues along the way, but it’s that quantity that we’re aiming for. So we’re not going to be looking actively to smooth out any of those swings in markets. We’re not targeting spreads. That’s not what we’re trying to do here. It is perfectly expected and actually what should happen that you do get spreads between different markets because of different risk implications, collateral conditions, different frictions between markets. Those provide important signals to participants, they’re an important function of those markets. We’re not looking to target those. So it really is purely about the system needs a quantity of liquidity, because it’s being demanded in aggregate, and how do we get that out there, and we can spread that out across different markets as we need to as well, just to make sure that we’re not creating disruption along the way. So we’re not targeting pricing.

Thank you, David. You talked in the speech a bit about the situation where eventually you may get more volatility or variability in money market rates between the weekly OMOs. Is there a scenario outside of an emergency where you would increase the frequency of the OMOs if demand gets to a point where it’s sufficiently high, or would the preference be to change some of the administered rates to essentially encourage more market activity in the repo market?

Okay, so I think – well, the question is would we, as we get closer, contemplate more frequent operations in response to market conditions. We’ve set weekly – we’re doing these weekly precisely to leave some space for the market. That’s the point of having the weekly operations. We’re not in there every day quite intentionally, because you just don’t have the same incentives or space for the market to distribute liquidity. The regime we’re after here is providing liquidity as available but leaving that space for the market to function. That’s a good thing. So having those operations as weekly means that once a week banks can get the liquidity they need planning for the week ahead, and if they need to, if it’s economic to do so, they can also use the overnight facility in between. So they’re the guard rails for that.

What would lead us to do something more frequent than that? It would need to be that we’re seeing something that’s persistently an issue with that set-up. As I said, we’re probably going to have a bit of learning along the way. If we see just some temporary learning, something happens – the Canadians have seen this, UK have seen this – the market is going to discover a bit about the distribution of liquidity, distribution of collateral. If it’s something that’s temporary that the market resolves then we’re not going to be responding to that. It would have to be that there’s something much more persistent that we’re seeing over a longer period of time and saying this is really not consistent with the objectives of the framework. That’s probably going to be – if you think about why you would need to be in the market more frequently it would be if there’s a monetary control sort of issue and that you’re seeing movement in rates affecting transmission of those rates. Not just moving in itself, it’s because it’s affecting the transmission of how those rates pass through the system. So it would need to be something more persistent like that.

As you say, there’s also the more stress-type conditions, and then in the past we have – we always have, if there’s a stress, if there’s a shock hitting the system we can respond very quickly to that. Drop of a hat we can adjust our operations in response to that. But in the normal course it’s not the plan, we would only adjust if there was something where our objectives weren’t being achieved, and that’s exactly why the message here is start getting ready, because that’s what we want to see.

If a small foreign ADI needs to make a payment of 20 billion at noon on a certain day due to an M&A transaction, how are they going to source their funds?

Okay. So I think this is about intra-day liquidity. The intra-day facility is there. It’s been there for a long time. It’s been used throughout the period of excess reserves, which is quite interesting. We see today that volumes in intra-day are still about 2 to 4 billion a day. And before the pandemic they were about 4 billion a day. So we’re still seeing lots of use of intra-day even though we’ve got a lot of reserves in the system. When we chat to people in the market they tell us it’s convenient. And that’s good, it’s there to be used. It’s exactly these sorts of things where there might be a large intra-day requirement that banks can, banks should, make use of intra-day. That facility is there to be used and nothing has changed on that front.

Thank you. Your survey and the reduction in bank demand or requirements, can you just elaborate a little bit on what you think is behind that and what changes in behaviours you’ve observed, I guess particularly perhaps since you changed the OMO rate, but how you think that’s evolved to the much lower number.

It’s a good question. It’s very important to us to be speaking to the banks about this and understand their thinking. As I said, not because we’re targeting anything, but we do want to understand exactly those sorts of questions. I think what we’ve learnt is people are thinking about it a bit more carefully, and that’s good. When there were very high levels of excess reserves in the system they have to be held somewhere, but as reserves are coming down I think what we’re seeing is there’s thinking very carefully about, well, what’s the – obviously there’s a prudent level of reserves that needs to be held, that’s up to banks to decide that – but then deploying those, thinking about maybe we can make these a bit more actively deployed and thinking about the range of markets that reserves could be deployed into, comfortable holdings, as I said, securities because those can be monetised with markets or with us. It’s think it’s really just been a bit of a process of learning a bit more and spending a bit more time learning that and being, I think, mindful that actually they’re okay to be at a lower level of reserves than they thought maybe they were happy to be at once they’ve given that a bit of thought.

In terms of the shift in the OMO rate, we do ask people about that. The survey results have regulatory requirements/transactional needs as right up there and the relative returns secondary to that. So the survey overall suggests, yes, obviously price has an effect on demand, but it’s not as important as thinking about those factors. Similarly, when we ask them about it, it’s factored into decision-making, factored into thinking, but it’s been more what are our transactional needs and our prudential needs and how do we want to meet those in the most optimal way. That’s more what we’ve seen. When I say it’s a welcome thing, I think it’s welcome because there’s active thinking about it, because it’s not just a lazy – we don’t want a lazy liquidity regime where it just sits there and isn’t thought about. We want a regime where you’re getting that balance between we have money in the system, that’s a good thing, we have healthy markets, that’s a good thing as well, which requires that you don’t have the lazy liquidity, it’s that there’s active thinking about it.

Thanks, David. I’m just curious, I think in your remarks where you talked about last year’s adjustment in the OMO rate you made the observation that potentially the OMO was inhibiting some of the functioning of the repo market, but it seems like contemplating the move to the ample regime that if there was similar impact on the repo market you’re now contemplating injecting liquidity via other mechanisms. Can we infer that in that situation where there is increased demand from the banks for reserves that an upward adjustment in the OMO rate going forward makes it harder to keep the overnight cash rate at target? Should we expect that it would be unreasonable at some point in time the OMO rate could adjust due to other reasons?

I think you’re asking if we’re – maybe this goes to the earlier question as well about adjusting the price and under what circumstances would we adjust the price. Is that a –

It sounds like – from my perspective, last time there was some – the OMO was kind of observed to be impacting the operation of the repo market, the RBA responded by increasing the price of OMO. It seems like going forward you’re contemplating if the OMO was deemed to be inhibiting market function in repo you would instead be injecting liquidity through FX and outright bond purchases rather than necessarily contemplating a further increase in the OMO rate.

I see, yes. Okay. Thank you. Good question. If I just go back to last year, it wasn’t a concern that we were inhibiting the repo market at that point in time. What it’s all been about is – if we think forward to ample and we expect – we fully expect it will be a good thing if we have a run-up in our OMO book, and just thinking ahead to that environment how do we make sure there are appropriate incentives at that point in time for there to be an active market. It wasn’t that we thought there were any sort of issues that we were trying to address at that point in time. It was really just let’s give this some – do some analysis and think about how – what we think the appropriate price is going to be at that point in time. So we’ve set it for that point in time.

In terms of how that interacts with the use of the non-OMO tools, we’ve set the price based on our three objectives, which is we don’t want too high a price because, as you say, then you’ll get too much volatility in market rates, don’t want too low a price because then we – liquidity is too cheap, we’ll disintermediate markets and too much activity will go across our book and we won’t leave enough space for those markets. So we would adjust the price if we found down the track at ample that we weren’t achieving those things.

As you say, the non-OMO operations give us certainly a degree of space in terms of how much liquidity we can inject into the system without that necessarily causing issues of market function because – as I said, we can – we expect to ramp up in the OMO book. We don’t think there’s any issues today with the size of our OMO book interfering with market function. The OMO book is historically at a low level, the market has grown, our footprint in the market is really very modest these days, so there’s lots of room for that scale-up. But then we can use those other tools, if we need to, to get an extra quantity of liquidity out there, which means that you wouldn’t necessarily have to contemplate at that point whether you’ve got the right price on liquidity.

But all of this – we’ve got a few different levers here, and I think it goes back to the earlier question as well. Bottom line, if we’re not meeting our objectives we can look across the different levers, be it the price terms, the non-price terms, the mix of operations, and say what’s the best way to adjust and we’ll do what is appropriate for those circumstances.

We might just take one more question from online. Has the RBA considered facilitating the pre-positioning of collateral by ADIs and the automation of overnight repo transactions to support liquidity management for NPP and other out-of-hours or weekend payment flows?

Pre-positioning is a big topic internationally at the moment. I think all central banks are thinking about this. It actually means a range of different things. What it really means is that – and in light of the experience of the speed of liquidity events that we saw with Credit Suisse a couple of years ago, and others, there’s operational readiness to act quickly and to be able to use collateral quickly. Now, in the Australian system – we’re not really talking – I would say we’re not talking – this is not really about monetary policy implementation. This is more about, I think, into the realm of things like ELA. But we’ve got self-securitisations, a key feature of the broader collateral that is available for things like ELA, and actually when you think about pre-positioning it’s the – having that collateral ready to go, and so that’s the credit assessment, putting that in a vehicle, having it in Austraclear and then it can be used relatively quickly. When there’s the extra question, are there steps beyond that in terms of legal transfer, I think that introduces questions of encumbrance and things like that. So we haven’t really contemplated that sort of thing. I think we’re comfortable and confident today that actually self-securitisation is quite a good vehicle for pre-positioning, but it’s important for banks and others to be thinking and making sure they have the appropriate quantity of those ready to go. That’s really outside of monetary policy implementation. That’s not the sort of collateral we’re talking about here.

In terms of automation of the overnight facility, that’s not something I think that we’ve looked at at this point. I guess we’re open to a conversation on that if people think that’s going to be a helpful thing, because we want to make sure that’s as usable as possible. Hopefully people – for our OMOs we’re using tri-party, we’ve just introduced a new system for more automated collateral management outside of tri-party so we’re looking at ways of making that seamless. If there’s a need for that in overnight we’re happy to have a conversation.

In a previous speech we’ve had discussions about whether the RBA may reduce or increase the corridor and reduce the ES rate to potentially help banks or incentivise banks to recycle cash. Was there any discussion or further discussion around that?

That goes back to my earlier point around the price. We’ve set that corridor – the key thing here – you can think of this as a fixed price system. We fix the price, which is the OMO-ES spread and then the system chooses the quantity. The way we have set that price is to think about once we’re at ample, what degree of monetary control do we think is appropriate, because we don’t want too low or too high a price for that. We can narrow it and we would have more monetary control, but then we would be fighting liquidity more cheaply and that would not be good for private markets. So we’re trying to find a balance there that is balancing both the need for monetary control and the need for healthy private market. So at this point we’re not seeing anything that would suggest there’s issues with that price. Monetary control is operating well, cash rate is at the target, that’s anchoring other rates in the economy effectively, we’re seeing those all trading consistently. Our OMO book certainly is not at the point now where we’re crowding out private markets. It’s really very modest. There’s nothing today which is suggesting there needs to be a recalibration. I know there’s been some speculation in the market as to whether we have a grand plan here as to – you know, this was the first step in something else. That’s not the case. This is we have set a price that we think is going to be right at ample, and if we see down the track that we have persistent issues around either monetary control or market functioning that suggests the price isn’t right we’ll adapt to market conditions, but that’s not where we are today.