RBA Asst Governor Kent: Cash Rate Could Become Widely Used Benchmark

By Sophia Rodrigues

Australia’s cash rate could become a widely used benchmark for some products if there’s a global shift towards referencing risk-free rates, Reserve Bank of Australia’s assistant governor Christopher Kent said Tuesday.

Kent was speaking at the Australian Securitisation Forum in Sydney on the topic, “Benchmark Reforms.”

Kent said that the global trend to use risk-free rates as the benchmark for some products could have an important bearing on the reference rates used in Australia.

“So regardless of the robustness of BBSW, we can expect to see a shift towards referencing risk-free rates in Australia for some products if that is the trend adopted offshore,” he said.

In Australia, the BBSW is the local credit-based benchmark along with the cash rate, also known as the AONIA.

As the end of Libor nears, regulators expect market participants to choose reference rates that best suit their products and situations. In some cases, the cash rate will make sense but in others the BBSW will continue to make sense, Kent said.

At the same time, Kent warned that the one-month BBSW is less liquid and hence not as robust as other tenors, and therefore other alternative benchmarks should be considered.

The RBA is the administrator of the cash rate benchmark which is derived from actual interbank overnight cash transactions. The cash rate is influenced by the RBA’s cash rate target and the interest rate it pays on Exchange Settlement balances.

There are procedures for determining the daily rate when volumes in the market fall below A$500 million, including use of expert judgement by the RBA.

In recent months, these procedures have been put to test because daily volumes dropped below A$500 million on several days, and as a result the cash rate was determined as the published rate.

Kent said that this has ensured the rate continues to reflect the interest rate relevant to unsecured overnight funds and the RBA can assure of its robustness as a benchmark.

--Contact: Sophia@centralbankintel.com