as we move to that approach. three options for policy implementation option 1 : a floor system with excess reserves – our current approach one option is to stay with the current approach. namely, an excess supply of reserves that leads the cash rate to be close to a floor. this floor is the rate paid to banks on funds left overnight in their es accounts – the es rate. the shift to this approach from the earlier system of scarce reserves began in mid - march 2020, as growing concerns about the economic effects of the pandemic led to stresses in global financial systems, including in australia. as a first response, the rba increased the extent of liquidity we were providing to banks ( graph 1 ; graph 2 ; graph 3 ). [ 2 ] settlement balances quickly ramped up as the rba met additional demand at our daily omos and bought government bonds in support of the functioning of those markets. reserves grew further with the advent of the term funding facility ( tff ) and bond purchases in support of the yield target, and then later in 2020 through the bond purchase program. graph 2 reserve bank assets $ b $ b - 100 open repo & other assets omo repo term funding facility source : rba. r e s e r v e b a n k o f au s t r a l i a domestic bonds gold & foreign exchange - 100 graph 3 reserve bank liabilities $ b $ b - 100 capital & reserve bank reserve fund banknotes exchange settlement balances - 100 gov. & other deposits other iiabilities accumulated losses source : rba. as es balances rose to high levels and the initial financial stresses in markets eased, most banks found they had a surplus of funds in their es accounts. therefore, the demand from banks to borrow from one another in the cash market to meet their payments and other needs declined. as a result, the cash rate became closely anchored to the es rate and activity in the cash market fell away markedly. es balances stabilised at around $ 460 billion in 2022, following the end of the bond purchase program, and since february 2023 have been declining as some of the bonds held have matured and the first tranche of the tff was repaid 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. we are confident that the

speech the future system for monetary policy implementation christopher kent [ * ] assistant governor ( financial markets ) bloomberg australia briefing sydney – 2 april 2024 i ’ d like to start by thanking bloomberg for hosting this event. today, i ’ ll be speaking about the future system for monetary policy implementation – that is, the method by which the reserve bank of australia ( rba ) controls the cash rate. planning for the future system is important given that the unwinding of unconventional monetary policies is leading to a decline in exchange settlement ( es ) balances – otherwise known as reserves ( graph 1 ). reserves held by banks in their es accounts at the rba play a central role in policy implementation. banks use these funds to settle payments with other banks and with the rba. they can also lend surplus funds to other banks in the overnight cash market. those transactions go into the determination of the cash rate. graph 1 exchange settlement balances * $ b $ b projected * * actual * includes minimum required balances to meet after−hours payments. * * assumes rba bond holdings are held to maturity and no net change in rba liquidity operations. source : rba at its march meeting, the reserve bank board considered three options for the future system for the implementation of monetary policy : 1. maintain the current ‘ floor ’ system with an excess of reserves ; 2. return to a ‘ corridor ’ system with scarce reserves, as used prior to the pandemic ; or 3. transition to a new system of ample reserves that lies somewhere between these two. the board endorsed a plan to move to an ample reserves system with full allotment repurchase agreement ( repo ) auctions for our open market operations ( omos ). the bank of england, the european central bank and the swedish riksbank have announced they will be operating similar systems. i want to emphasise that this decision has no implications for the current or future stance of monetary policy. rather, it is only relevant to the way in which we will achieve the desired stance of monetary policy through our operations. nor does it have a bearing on the board ’ s current approach to quantitative tightening, which is to allow bonds purchased during the pandemic to run down as they mature and to periodically review the case to actively sell bonds. today i ’ ll explain the three options for policy implementation, discuss some of the reasons why the board has chosen to pursue the ample reserves system, and lay out the next steps