Open-market-operations (OMO): tools and implementation Since 1990, the Reserve bank of Australia has used forward guidance to announce the desired stance of monetary policy in Australia. The bank announces a target for the interest rate on overnight funds borrowed and lent in the interbank market. An important influence on pricing in this market is the level of aggregate balances that banks hold in their Exchange Settlement (ES) accounts at the Reserve bank. These accounts are used by banks to settle payments amongst themselves and with the Reserve bank. By operating in this market, the Reserve bank is able to control the level of aggregate balances and thus indirectly affect the cash rate. The Reserve bank’s objective is to keep the overnight rate within an operating band of 50 basis …show more content…
The financial system proved to be markedly resilient and notably, Australian banks did not require any capital injections. That said, the financial market was not immune. In particular, conditions in the foreign exchange market were particularly illiquid. The sharp depreciation of the AUD in July 2008 (30% drop) prompted the RBA to intervene in the market and support the currency (Graph). Moreover, as the crisis unfolded, the RBA undertook two unconventional measures. The first measure was to provide extended opportunities for banks to borrow from the Reserve bank. The RBA significantly increased the Aggregate Exchange Settlement (ES) balances to a peak of $10billion, which usually runs at $1 billion daily. Since banks were wary to lend beyond short-term maturities, we can see from Appendix 4 the corresponding demand for RBA term deposits. The second measure was to provide loans or make direct purchases to support certain credit markets. The Reserve bank invested $700M in the mortgage market to stimulate the housing. Finally, the Australian government increased bank guarantees to $1M