Transcript of Question & Answer Session The RBA’s Monetary Policy Implementation System – Some Important Updates

Thanks, Chris. A couple of questions coming in from the audience. We might have time for one more, a couple more if anyone wants to send them, but let’s take at least a couple of these. Chris, how do you think about the trade-off between letting markets take care of liquidity management and allocation versus the RBA sitting as a backstop with open market operations? How are you calibrating the liquidity approach so market forces are still present?

That question really is at the heart of my presentation today and the key consideration here is those three principles. First and foremost, it’s about monetary control. But we also, as much as we can, want to encourage private market activity - that’s to ensure that the financial system is as healthy as it can be - and take on no more risk on our balance sheet than is necessary. So how have we done that? Probably the first way and the most obvious is to make sure OMO is not too cheap. So we’ve increased the price. It’s gone from five above the cash rate target to 10. The other thing is it’s not too frequent. It’s not every day. So there’ll be other days where there is no more liquidity in the system than was provided by our other operations and our OMO on the Wednesday that’s just passed. So that will encourage banks that have a need on those days to go to other banks and to markets to look for liquidity. And then I think the other thing to recognise, too, is also to have appropriate tenors. So not too much, not really short-term. So if you need really short-term funding, even shorter than seven days, there are better options than coming to us. That’s sort of how we’re thinking about these things. There’s the price, but also other operational aspects that help encourage private activity.

Thanks, Chris. Let’s move on to the next one. Is there a level of balance sheet growth through OMO with which the RBA would be uncomfortable?

You might think there would be, but the answer is no, and that is because under full allotment auctions OMO is going to be the marginal source of reserves, but it’s really going to determine according to the banks’ needs the size of the RBA’s balance sheet. Now, under the old system, the corridor system, we used to determine that, but under this system it’s the banks that will ultimately determine the size of our balance sheet.

Now, the price of OMO will have an effect. A slightly higher price means banks will demand a bit less than otherwise and be encouraged to economise on reserves at the margin. The other thing we can do to affect the risk on our balance sheet is to have various mixes of operations, and I mentioned we’ll be thinking about that and announcing plans in due course on things like FX swaps and AGS purchases, but from my charts you can see we don’t need to purchase AGS for some time

Thanks, Chris. Another question has come in while you were talking. If changing the ES rate does not require Board approval and is not announced at the monetary policy meeting, through what channel is it going to be announced should there be changes?

Good question. We put out important market announcements on a regular basis on sometimes things that don’t relate to Board decisions, so we’ll just use the usual channels and get them out there, make sure that everyone has equal access to them in a timely fashion.

Brilliant. Thanks, Chris. We’re more or less on time and I think we’re out of questions, so I’m sure everyone would like to join me in thanking Chris for his thoughts today. Thank you.

Thank you. Thanks, everyone.