The RBA’s Market Operations:
The RBA’s market operations are very important because it is how the bank influences not only economic activity but also inflation. (RBA 2007, Central Bank Market Operations, pp.19) Market operations are used to implement monetary policy, which involves dealing in markets to influence the interest rate on overnight funds in the money market. A target cash rate is set by the RBA for a period which in effect determines the interest rate that ADI’s charge on loans. Once the target cash rate is determined it is then the responsibility of the Domestic Markets department of the RBA to manage the cash rate and keep it in line with the target. One of the major indicators is the balance ADI’s hold in their Exchange Settlement Accounts (ESAs). The purpose of ESAs is to hold the funds required for ADI’s to meet their payment obligations between each other and the RBA on a daily basis. This could be achieved by holding very large sums of money in their ESAs, but the RBA only pays a small interest rate of 25 basis points below the cash rate on these balances. (Hunt & Terry, 2008, pp. 45) As a result ADI’s hold most of their liquid reserves in the interbank overnight market where they can earn the cash rate. The market for overnight funds is used by ADI’s to lend surplus ES funds or borrow additional ES funds depending on the following days expected settlement obligations, relative to the current balance in their ESA. Funds can be easily moved between the overnight market and an ADI’s ESA providing flexibility for when they may require additional ES funds or so they can reduce the amount of ES funds held. When an ADI meets their payment obligations to another ADI, the other ADI can then lend the excess ES funds in the overnight market. The responsibility of the Domestic Markets Department is to make sure that the total amount of exchange settlement balances is sufficient for the cash market to clear each day at the target cash rate. (RBA 2007,...
Bibliography: Hunt, B., Terry, C., 2008, Financial Institutions and Markets, 5th edition, Thomson, Australia
RBA (2007), “Central Bank Market Operations”, Bulletin, September, pp. 19-26 (excluding pp. 23-24)
RBA (2007), “Statement on Monetary Policy”, Bulletin, November, pp. 47
RBA (2007), “Open Market Operations and Domestic Securities”, Bulletin, December, pp. 25-31
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