About Market Operations

Domestic Market Operations

The Reserve Bank undertakes transactions in domestic 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 provide liquidity to the payments system and manage the financial risk of the Reserve Bank's balance sheet.

The cash rate is determined by the supply of and demand for exchange settlement (ES) funds. These are funds held in accounts at the Reserve Bank by a number of financial institutions, and are used by these account holders to meet settlement obligations.

The Reserve Bank is able to control the supply of ES funds through its open market operations. When the Reserve Bank buys securities, it pays for them by crediting the ES account of its counterparty (or the ES account of the financial institution of which its counterparty is a customer), adding to the overall supply of ES funds. Sales of securities have the opposite effect. The securities which the Reserve Bank is prepared to purchase in its domestic market operations are limited to highly rated Australian dollar denominated securities.

The Reserve Bank also operates a number of standing facilities that are principally used to provide financial institutions with funding to manage their (and their customer's) payments activity. Funds accessed are either repaid to the Reserve Bank on the same day, or are held overnight in the recipient's ES account with the Reserve Bank. On the rare occasion that a financial institution needs to borrow from the Reserve Bank overnight, there is a standing facility through which the Reserve Bank agrees to extend funding at a higher rate of interest.

International Market Operations

The Reserve Bank undertakes a range of transactions in the foreign exchange market and foreign debt and money markets. This activity is managed on a global basis through the Reserve Bank's offices in Sydney, London and New York. The Reserve Bank operates in the foreign exchange market on a regular basis to meet the foreign exchange needs of its clients and to assist with domestic liquidity management. From time to time, the Reserve Bank may also enter the foreign exchange market to address disorderly market conditions or gross misalignments of the value of the Australian dollar. These operations are commonly known as foreign exchange intervention.

Much of the Reserve Bank's activities in foreign asset markets reflect the discharge of its responsibility for the management of Australia's international reserves. These foreign currency assets, which are held on the balance sheet of the Reserve Bank to facilitate policy operations, are invested almost entirely in high quality sovereign debt, gold and liabilities of the International Monetary Fund. The risk management process for those assets invested in debt and money markets is guided by an internal benchmark and involves daily activity in the underlying investment markets.