Transcript of Question & Answer Session Changes to the Reserve Bank's Open Market Operations

Thank you, Chris. Just a reminder that if you'd like to ask Chris a question, please post all your questions via the chat function which can be found in the bottom right hand corner of your screen.

The first question we have, comes from Yeeshu Kumar at Barrenjoey Capital. He asks: if interest rates were to return to more normal levels, would the rate that the bank pays ADIs on excess balances in their exchange settlement accounts remain at 10 basis points below the cash rate target or would it revert to the pre-pandemic 25 basis points. Does the excess reserve framework currently in place as a result of the TFF and the RBA quantitative easing program have implications for such decisions?

Thanks for that question. I think the starting point is to say any decisions on these policy rates, the rate on ES balances and the cash rate target, those are for the Board. The Board might see fit to make adjustments, particularly to that gap which is what this question's referring to, which is currently 10 basis points. It would do that depending on the evolution of financial market conditions. But, as I've outlined in my speech, the value of ES balances are going to remain very high for an extended period. So I would not anticipate a need to revert back to the arrangements that were in place prior to the pandemic any time soon.

In terms of the TFF and the bond purchase program and the question of whether or not they have implications for this. The TFF will roll off sooner of course, but because of both of them, ES balances are going to remain high and particularly the bond purchase program for some time yet. In that environment, the cash rate will likely remain between the cash rate target and ES balance rate, which is what it's done for some time now. But certainly no more than the cash rate target if OMO provides a source of liquidity at the cash rate target or no higher. Thanks.

Thank you, Chris. Our next question comes via AFMA member through the AFMA secretariat: The RBA has announced a decision will be made at the May meeting about reinvestment of bond proceeds. Will the pace of RBA balance sheet reduction around 2023 to 2024 TFF maturities be a factor in that decision? Or does the RBA view the runoff profiles for the TFF and bond purchase programs in isolation?

The decision about reinvestment of maturing bonds. The key consideration there is the state of the economy and the outlook for inflation and unemployment. And we've argued that the TFF has been a helpful part of the policy package that's contributed to low funding costs for banks, and being passed through to very low rates for households and business borrowers. And as the question suggests, maturities are going to start off for the TFF coming through next year and then more into 2024.

For bonds, those maturities, there are modest ones in July, November and then a larger one in April of next year. But all of that and the timing of that, that's all well known in the market. No obvious implications for the current state of the economy. So I think the timing of those maturities in the future, I don't think they have significant implications for the current outlook or the current course of the economy, other than the support they've already been providing … that is factored into the current economic conditions and the current outlook. There's a bit of time between now and May to see how those conditions evolve, how inflation and unemployment evolve, and that's what will determine the decision on reinvestment.

Thank you. This one also comes through the secretariat, in fact, the rest all do so I want to keep saying that. At the start of the pandemic, the RBA expanded the range of repo eligible securities to include corporate paper with appropriate ratings. Will this be wound back or is corporate paper now permanently repo eligible?

The background of this is we started to accept investment grade corporate paper as collateral for the bank's repo operations. That was an expansion of that program. We announced that back in May 2020 and the logic of that decision was going to help to assist with the smooth functioning of Australian capital markets. In that regard, I do think it appears to have had a small, positive benefit, at least in terms of the liquidity of those securities at the margin. The Bank manages this and the risks implied by taking this collateral, not only by ensuring that the paper is well rated, but also by applying appropriate haircuts to that paper.

As I emphasised in the speech, the OMO framework does evolve over time in response to changing circumstances. But I don't think there's a need to wind back that change. I don't think that's imminent or pressing. I would expect that we'll continue to accept those securities and provide that marginal extra support to markets.

Thank you. The next question is: Would you consider changing your OMO design again in the future?

Well, as I've suggested in the speech, it's an evolving framework. Certainly nothing is set in stone. The key things we're focused on, and what I want to emphasise is these sort of benefits. And now those are focused on providing short term liquidity to banks and financial institutions that maybe don't have quite the same access to liquidity as some other institutions. But also quite importantly, to provide a liquidity backstop in the event of broad-based funding pressures, which can arise from time to time. But if conditions evolve and further changes are needed to make sure those benefits continue, then yes, we'll make these adjustments, but we don't make these changes more often than necessary.

Thank you. Just a reminder, if you want to ask any questions of Dr Kent, please post all questions via the chat function, which can be found in the bottom right hand corner of your screen.

The next question is a question I guess a lot of people are asking. Why choose floating rate repos? Why not just stick with fixed rate repos?

The longer term plan, as I said is to move to floating rates. I think the point of that is to ensure the return on OMO repos is going to remain aligned with overnight market rates over the life of the repo, even in the face of the possibility in the future of policy rate changes. We want that to work well, regardless of the repo term or the level of uncertainty over future policy moves, and I'm not talking just potential moves higher in the future, but also moves lower beyond that. This is different to using fixed rates, which may or may not reflect the overnight rates over the life of the repo and using a floating rate based on the actual overnight interest rates, rather than just those which are projected, helps to avoid those sorts of problems.

Thank you. There's been a lot of volatility and illiquidity at times throughout the last two years due to the pandemic. What if going forward, there are signs of funding pressures in markets?

Through our dealing room and the contacts we regularly have with market participants there, we closely monitor market conditions through that channel. We maintain a liaison program with market participants and AFMA member market committees are a key part of that; as well as just monitoring market prices on a regular basis, on a high frequency basis. In the event of funding pressures, we would expect our dealing volumes to increase as OMO repos become more attractive to market participants because they can source funding at a lower cost or in larger quantities that might be available in times of stress from private markets and that's a very good thing. That's the design of OMO. That's what it's there for and that should also help to contain any emerging tightness in money markets before it becomes too acute. I think that was the experience immediately following the pandemic.

And if conditions warrant it, the bank's prepared to change the parameters of its open market operations, such as the frequency of terms, which we offer. Sorry, the frequency of conducting the operations, as well as the tenor of the terms that are on offer and that's always been the case and will continue to be so.

Tremendous. Thank you. Well, it seems that, oh, wait a minute, sorry. Last question coming through. Are you worried that using floating rate- Oh, hang on where it go? Just disappeared there from somewhere.

Do you want me to read it out for you? ‘Are you worried that using floating rate repo creates a circular logic for the cash rate target, given in a post QE world OMO is the main tool for ensuring the cash rate is at target?’

I think that the gist of this question is there potential circularity if we were to base OMO on a market assessment of what the cash rate might be. That's certainly what we're going to do in the interim. I don't think that will be problematic to the extent that those market expectations over a period of time are unbiased. There is some logic to the question, but I think that's why if what we do is base OMO on a cash rate target, which is a policy decision the Board makes, and it's an ex-post rate – you'll only find out the cost of this after the fact when the repo is rolling off – then you short circuit that problem entirely. We'll be providing OMO always at the average of the prevailing cash rate target over the term of the repo and that should avoid that problem.

Thank you, Chris. I seem to have lost some functionality. Can you see that next question coming through?

The question is: ‘May I please ask whether there will be a similar move to floating rates and or OIS based rates on the RBA AOFM securities lending? And will the change to floating OMO repo impact or negate overnight SF repos?’

There are no plans to make that move. I'm trying to imagine why we might want to do that, but the reasoning escapes me for now. I don't see there'd be a need to do that. What we are doing in lending out from our existing pool of securities is very similar to the sorts of private transactions that occur in repo markets between private sector participants. We're just drawing on the large pool of securities we've accumulated as part of our bond purchase program and the support of the yield target. I think we're just following conventional market practise there, and there's no reason to make a change in that direction.

So we might just leave it at that. AFMA once again, would like to thank Dr Chris Kent for joining us today and outlining the new Open Market Operations of the RBA. And we wish you all the best.

Thanks Mark. And thank you everyone for attending today and enjoy an early lunch break, I guess. So thank you all.