Insight: RBA Determines Cash Rate is 0.13%

• Published on
• 16 Jun 2020, 01:52 PM

By Sophia Rodrigues

Less than three months after cutting the cash rate to a record low, the Reserve Bank of Australia has made its own 0.25% target redundant by setting the rate 12bps lower at 0.13%.

While the 0.13% record low cash rate is not a new development and was reached on 12 previous occasions during the period April 27-June 15, there is a key difference between the cash rate on those occasions and on June 15.

On ten of those 12 occasions, the cash rate was calculated as per the usual convention -- the volume-weighted average interest rate at which cash market transactions are settled, rounded to two decimal places.

On two occasions, the cash rate applicable on the preceding business day was used to publish the rate because volumes had dropped below the minimum A$500 million threshold. This was in line with the RBA’s fallback procedures.

RBA “SET” CASH RATE

On June 15, the RBA used another fallback procedure to publish the cash rate.

It set the cash rate. And it is the first time ever the RBA did so.

As a background, the RBA doesn’t set the set cash rate. It sets the cash rate target.

On the other hand, the cash rate is calculated as the weighted average of the interest rate at which overnight unsecured funds are transacted in the domestic interbank cash market.

Until late-March, the RBA’s cash rate target was very effective -- so effective that it was the only central bank in the world that managed to ensure the cash rate was exactly equal to the target.

For over ten years, the RBA had an unblemished record – every single day from 21 January 2010 to 24 March 2020.

But on June 15, the RBA set the cash rate because it made an “expert judgement” that publishing the rate based on the previous day was not a true reflection of the cash rate.

The RBA decided it should set the cash rate based on a rate that reflects the interest rate relevant to unsecured overnight funds and based on market conditions. On that basis, it set the cash rate at 0.13%.

RBA LESS TRANSPARENT

Interestingly the RBA has become less transparent with its data on the cash rate.

Each day the RBA publishes the cash rate, the highest and lowest overnight cash rate, volume and number of transactions.

But it has now decided to only publish the cash and the volume on days when the volume is below A$500 million. The number of transactions and the highest and lowest rate will not be published because the RBA doesn’t think it is useful to publish those details.

Significantly, the RBA’s latest data has also removed the details for all those days since May 5 when volumes were less than A$500 million.

The lowest ever volume was A$42 million on May 12 when only two transactions were recorded. The RBA likely fears there will come a day when only one transaction is recorded and publishing all the information might lead to revealing too much information.

--Contact: Sophia@centralbankintel.com