RBA Asst Governor Kent Announces Plan to Move to Floating Rate Repos

• Published on
• 22 Feb 2022, 12:15 PM

RBA Kent: Move To Floating Rate Repos Based On Cash Rate Target During Repo Term
--Move To Happen After Receiving Market Feedback
--Operational Changes To Repo Not Guidance On Future Monetary Policy Path
--Reduce Maximum Term of Repo To Four Weeks (Three Months Currently)
--Current Repo Rate Won’t Be Appropriate In When Short-Term Money Mkt Rates Rise

By Sophia Rodrigues

(Sydney, February 22, 2022)—The Reserve Bank of Australia is making operational changes to open market operations in preparation for an eventual rise in the cash rate target by shortening the maximum term of its open market repurchase agreement and moving to a floating rate repo that will be based on the average cash rate target over the term of the repo.

The timing of the move to floating rate repo will be determined after receiving feedback from market participants while the reduction in maximum repo term to four weeks will take effect immediately.

RBA’s Assistant Governor for financial markets Christopher Kent made the announcement in a speech to the Australian Financial Markets Association Tuesday.

Prior to the move to floating rate repo, from March 30, the hurdle rate for OMO will change from the current cash rate target to the rate on term-matched overnight indexed swaps plus a modest spread of around 5 basis points. The spread is subject to change depending on market conditions.

Kent stressed the operational changes do not provide any guidance on the future path of monetary policy but he did note that the current arrangement where the repo rate is based on the cash rate target on the day can cause problems when short-term rates eventually go up.

“Looking ahead to the time when short-term money market rates eventually rise, it will no longer be appropriate to continue with a repo rate that is determined based on the cash rate target prevailing on the day of the OMO.”

“If the OMO repo rate were to be below short-term money market rates of an equivalent term, demand for liquidity at the Bank’s OMO would rise noticeably, potentially leading to destabilising moves in other markets.”

The move to base the OMO repo rate first on OIS plus a spread, and in time to a floating rate based on the cash rate target, will avoid such a situation, Kent said.

The maximum term of the repo is currently around three months.

Open market repos remain an important source of liquidity even in the current ample reserves environment as individual financial institutions who don’t have access to liquidity as readily as others can tap it from the RBA. OMO also provides a backstop to the banking system as a whole in case there is a sudden broad-based increase in demand for liquidity.

Prior to the Covid-19 pandemic, the RBA targeted the quantity of liquidity provided through OMO, and the repo rates were determined through a competitive auction process. But since the pandemic, it stopped targeting a set amount of system liquidity but instead sets the price.

--Contact: sophia@centralbankintel.com