Australia’s central bank revamps market liquidity operations

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SYDNEY, Feb 22 (Reuters) – Australia’s central bank is shaking up the way it provides liquidity to the banking system as it ends quantitative easing and prepares for the day when it eventually raises interest rates.

Speaking at an online event, Reserve Bank of Australia (RBA) Deputy Governor Christopher Kent stressed that the changes to its open market operations (OMO) were not a signal on the future direction of monetary policy.

“Rather, they will ensure that the OMO remains responsive to changing liquidity conditions, economic prospects and the Bank’s monetary policies,” Kent said.

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RBA Governor Philip Lowe recently said it was plausible that the 0.1% cash rate could rise later this year if the economy continues to improve, while financial markets bet on an increase from June.

Financial institutions typically use the OMO to borrow from the RBA for short-term liquidity, although the need has declined sharply over the past couple of years as the RBA has flooded the system with liquidity through longer-term loans. long term and bond purchases.

Now that the RBA has stopped buying bonds, this excess liquidity will slowly diminish and OMOs will likely become more important again.

To prepare for this, Kent said the interest rate charged by the RBA on OMO loans would change from a fixed rate to a variable rate based on the average cash rate over the life of the loan.

Kent said the RBA wanted to hear feedback from market participants before adopting the measure.

In the meantime, the RBA would charge a hurdle rate based on term-based overnight index swaps, plus a spread of 5 basis points. This change would take effect on March 30.

The maximum duration of OMO loans would generally be reduced to four weeks, but could be extended if necessary.

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Reporting by Wayne Cole; Editing by Sam Holmes

Our standards: The Thomson Reuters Trust Principles.

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