RBA Excess Reserves Persist Amid Transition to New Framework

The Reserve Bank of Australia (RBA) has confirmed that its financial system still holds excess reserves, despite a significant decline in recent years. In his speech on 'Ample Reserves Policy', David Jacobs, head of domestic markets at the RBA, stated that the current level of reserves remains above underlying demand as the central bank proceeds with its transition to a new liquidity framework.

According to Jacobs, the new framework allows the RBA to supply whatever quantity the banking system demands while maintaining short-term interest rates near the Official Cash Rate. The RBA aims to provide sufficient liquidity to banks while keeping interest rates stable.

The level of reserves has fallen by more than half since 2022 as assets acquired during the pandemic mature, and this trend is expected to continue. However, funding remains available at low cost in the short-term repo market, and usage of the full allotment open market operations conducted under the new framework remains limited.

Jacobs noted that it's uncertain when the 'ample reserves state' will be reached, but it could arrive sooner if banks increase their demand or if frictions emerge in the market. He emphasized that the RBA is progressing smoothly with its transition to the new liquidity management framework.