Market Operations

The Reserve Bank undertakes transactions in domestic financial markets to implement the policy decisions of the Reserve Bank Board and facilitate the smooth functioning of the payments system.

Conventionally, an important aspect of implementing policy decisions involves the Reserve Bank transacting in domestic financial markets in its open market operations to keep the operational target for monetary policy – the cash rate – consistent with the target rate set by the Reserve Bank Board. The cash rate is the interest rate on unsecured overnight loans between banks. The Reserve Bank is able to control the supply of funds in this market through transactions, affecting both the cash rate and liquidity provision to the financial system.

In March 2020, in a comprehensive package to support the economy from the effects of COVID-19, the Reserve Bank Board announced additional policy measures to be implemented through Reserve Bank domestic market operations.

As a result, the Reserve Bank can undertake purchases in the secondary market of government bonds, as required, to achieve a target for the yield on 3-year Australian Government bonds of around 0.25 per cent, as well as to address market dislocations.

The Reserve Bank also transacts with authorised deposit-taking institutions to provide funding through a term funding facility offering three-year funding at a fixed rate of 0.25 per cent. This new facility is in addition to a number of existing standing facilities that are principally used to provide financial institutions with funding to manage their (and their customer's) payments activity.

In this environment, the Reserve Bank’s open market operations continue to play an important role in ensuring there is sufficient liquidity in the financial system. The size and term of these operations are adjusted as required to support liquidity in the financial system.

The Reserve Bank also undertakes transactions in the foreign exchange market on a regular basis. Many of these transactions arise out of the provision of foreign exchange services to clients, with the Australian Government the Bank's largest client. The Reserve Bank manages Australian dollar liquidity through foreign exchange swaps as necessary. Transactions are also undertaken in the foreign exchange market, as well as foreign asset markets, in managing Australia's foreign currency reserves. Foreign currency reserve assets are held on the balance sheet of the Bank, with the currency allocation, asset allocation and interest rate risk on investments managed against benchmark targets. Foreign currency reserves are deployed from time to time to effect policy operations in the foreign exchange and domestic cash markets.