The Reserve Bank of Australia (RBA) has decided to maintain the current cash rate at 4.35 percent, according to the minutes of its March 18 to 19 board meeting.
The decision to pause rate hikes by the RBA reflects several factors, including GDP growing below both its historical trend and population growth, ongoing moderation of inflation in recent months, and minimal changes in Australia’s financial conditions.
Board members also observed that the path of disinflation for other countries did not go smoothly, which may serve as a lesson for Australia.
Moreover, the members noted the challenges faced by some households in servicing debts and meeting essential expenses.
“In particular, members noted that the data had continued to indicate that inflation was high but gradually returning to target, and that the labour market was moving towards conditions consistent with full employment,” the minutes said.
RBA Changes Reserves System
On the same day, RBA Assistant Governor Christopher Kent said that the central bank is gearing up to manage the liquidity needed to sustain the financial system, especially as many bonds purchased during the pandemic are maturing.
He announced that the RBA will be changing its reserve system to match the Bank of England, the European Central Bank, and the Swedish Riksbank.
Currently, the RBA operates on a floor system with excess reserves, where banks receive a rate for funds left in their Exchange Settlement (ES) accounts.
Mr. Kent said that ES balances have been declining since February 2023 due to maturing bonds, and the repayment of the Term Funding Facility’s initial tranche by September 2023.
“ES balances will decline further when the remaining $96 billion of the TFF is repaid by the middle of this year, and as the RBA’s bond portfolio continues to decline,” Mr. Kent said.
“The board has decided not to maintain the current floor system with excess reserves. One reason is that it would require the RBA to hold a sizeable buffer of reserves over underlying demand, necessitating a relatively large balance sheet on an ongoing basis.”
Mr. Kent said that the board also does not want the RBA to return to the scarce reserves system as it possesses the highest risk of the banking system running into liquidity shortages.
“An ample reserves system also reduces the risk of unnecessary volatility or disruption to conditions in money markets,” Mr. Kent said.
He emphasised that it would also be more resilient to future expansion in the RBA’s balance sheet, for example, there was a need to address extreme stresses affecting bond markets, such as at the onset of the pandemic.
“With the supply of reserves just sufficient to satisfy underlying demand, the RBA’s balance sheet will be no larger than it needs to be in order to implement monetary policy, and our footprint in financial markets will be smaller than in an excess reserves system,” he said.
