Insight: RBA Committed to Keep Money Market Rates at Low Levels

• Published on
• 11 Jun 2020, 11:15 AM

By Sophia Rodrigues

The Reserve Bank of Australia is committed to ensuring money market rates remain at the recent low levels and is prepared to provide funding through repos to meet that goal.

So, any spike in interest rates or widening in spread between various money market rates due to reduction in liquidity from maturing repo is unlikely.

OVERALL ES BALANCES HIGH

Importantly, the RBA judges the overall level of Exchange Settlement balances as “high” even after considering large moves in those balances. But if market requires funding on any given day, the RBA is prepared to meet that request.

The level of total ES balances, and surplus ES balances have reduced in recent weeks from a record high of A$116.6 billion and A$89.0 billion on April 8. On Wednesday it stood at A$74.4 billion and A$47.5 billion, respectively. It had touched a recent low of A$70 billion and A$42.6 billion on June 5.

One reason for the reduction in ES balances is the mismatch between new repos and maturing repos, meaning maturing repos have been higher than the amount of new liquidity injections.

But a bigger and an important reason is the increase in the government’s cash balance. The Australian Office of Financial Management has been borrowing through bond tenders, syndications and Treasury Notes at an elevated pace since late March. However, the government spending appears to have considerably lagged the borrowing, resulting in government cash hitting record highs in recent days.

As of May 31, the government had A$64 billion term deposits with the RBA, and this rose further in the first week. There has been some spending in recent days towards JobKeeper and other payments, but the cash balance is still estimated to be at record levels.

If that balance came down to “normal” levels, the ES balances currently would be significantly higher.

RBA WON’T ALLOW ANY SPIKE

Still, the RBA is prepared to meet any requests for liquidity needs. On June 9, the RBA injected new repos totalling A$3.5 billion on a day when A$7.2 billion of repos matured, thus proving its commitment towards keeping money market rates low.

This liquidity injection following total dealings of A$3.7 billion in overnight interbank cash market on June 5, which was the highest since mid-March. While this did not have any significant impact on money market rates, a tiny rise in 6-month BBSW rate and the cash rate was seen recently. The RBA may be keen to avoid any noticeable rise in any money market rates.

Interestingly, the RBA’s liquidity injection and likely inflows from government spending has resulted in a fall in overnight cash market volume. On June 9 and 10, volumes fell below A$500 million, requiring the RBA to once again use expert judgement to calculate the cash rate based on the last published rate which was 0.14% on June 4.

--Contact: sophia@centralbankintel.com