Open repo facility to end as bank demand for reserves declines
The Reserve Bank of Australia announced it will cease its open repo facility early next year while transitioning to a demand-driven ample reserves framework. Bank surveys show preferred reserve holdings have fallen to between $70 billion and $100 billion.
From surplus supply to bank demand
The Reserve Bank of Australia is shifting monetary policy implementation from pandemic-era excess supply to a demand-driven ample reserves framework.
Under the design, the central bank supplies reserves through full-allotment open market operations priced 10 basis points above the cash rate target, while the Exchange Settlement rate sits 10 basis points below.
System reserves injected during the pandemic have halved from their peak of nearly $500 billion, and bond portfolio maturities continue to drain $20 billion to $40 billion annually.
Bank surveys indicate expected reserve holdings have dropped from $100 billion to $200 billion in 2024 to between $70 billion and $100 billion.
Retiring a scarce-era backstop
With reserves readily available through full-allotment operations, the RBA decided to cease its open repo facility early next year.
Introduced in 2013 to support after-hours payments under scarce reserves with an estimated requirement of $20 billion to $30 billion, open repo usage has fallen below $5 billion.
To ensure repo market functioning as operations scale up, the RBA can deploy foreign exchange swaps, cross-currency basis swaps, and short-term government security purchases as complementary liquidity tools.
Pragmatic plumbing, real tests ahead
Sunsetting open repo is a sensible cleanup of obsolete monetary plumbing.
Yet assuming bank reserve demand stays near $70 billion overlooks potential regulatory hoarding and liquidity friction.
The framework will face its true test only when market turbulence tests counterparty willingness to tap central bank facilities.