Australia’s Reserve Bank said on Tuesday that system reserves remain above demand as it implements a shift to a new liquidity framework designed to anchor interest rates near the official cash rate target.
Reserves have fallen by more than half since 2022 as pandemic-era central bank assets matured, yet the RBA’s Head of Domestic Markets, David Jacobs, indicated that current levels still exceed banking sector requirements. The central bank announced in 2024 its plan to transition to a system of ample reserves, replacing the prior floor-based approach that relied on excess reserves and an exchange settlement rate.
Under the new framework, the RBA supplies liquidity through open market repo operations priced near the cash rate target, ensuring banks’ needs are met without relying on a fixed reserve floor. Jacobs noted that short-term repo markets continue to offer cheap funding options, while the utilization of full-allotment open market operations has remained modest. "Taken together, those indicators suggest that we're not yet in an environment where the level of reserves is driven by demand," he said.
The timing to reach a state of ample reserves remains uncertain, Jacobs added. "When we might reach ample reserves ultimately remains highly uncertain. It could be some years away... But it could also be earlier if banks increase their demand or there are market frictions." The RBA’s transition reflects a broader shift in monetary policy tools following the unwinding of pandemic-era stimulus measures.
