bank has not actively sterilised its bond purchases or tff funding, it allowed its portfolio of short - term foreign exchange swaps, which were previously used for domestic liquidity management purposes, to run off. see rba ( 2020 ), statement on monetary policy, august. the story is similar for a maturing bank bond that was issued offshore in foreign currency : in this case the australian bank would have exchanged the foreign currency raised when the bond was issued for aud in the foreign exchange swap market, with the fx swap transaction unwinding when the bond matures. if the bank bond is not rolled over, the provider of aud in the fx swap will be left with those aud at bond maturity, and will need to find a new investment to place the funds into, putting downward pressure on the relevant aud interest rate. note that part of the sharp increase in assets in late 2008 was due to valuation effects on the bank's foreign reserve assets associated with the sharp depreciation of the australian dollar. the more gradual increase in the balance sheet up to 2007 reflected the fact that the australian government was running successive budget surpluses and the funds resulting from that were held as deposits at the rba. to sterilise the impact on liquidity the central bank built up its fx swap portfolio given that the government bond market was relatively small and illiquid at that time. the creation of the future fund meant that government deposits at the rba fell sharply in 2007 and the swap book was quickly unwound. the noticeable rise in the bank's balance sheet in late 2013 was due to the introduction of same - day settlement of direct entry payments, which required the rba to implement a system of overnight liquidity using open repos remunerated at the cash rate target. for further details see rba annual reports from the time, available at < https : / / www. rba. gov. au / publications / annual - reports / >, and also debelle g ( 2008 ), ‘ market operations in the past year ’, speech at the 2008 fta congress, melbourne, 31 october. the materials on this webpage are subject to copyright and their use is subject to the terms and conditions set out in the copyright and disclaimer notice. © reserve bank of australia, 2001 – 2020. all rights reserved. the reserve bank of australia acknowledges the aboriginal and torres strait islander peoples of australia as the traditional custodians of this

economy and support the provision of credit, and it has broadly worked as expected. at the same time, however, it's no longer possible to summarise the stance of policy by reference to the cash rate target alone. other elements of the policy package have to be taken into account. these other elements affect the transmission mechanism in various ways. today i'm going to discuss these channels and how they work. this will also clarify how we can assess the stance of monetary policy. i find it helpful to split our policy tools into two broad groups as follows : first, there are interest rate tools, which are primarily focused on achieving a particular interest rate, such as the cash rate target, forward guidance and the bond yield target. these are relatively straight forward to assess, but the obvious point is that we need to look at more than just the current cash rate target. second, there are tools that operate by providing liquidity or longer - term funding. these also affect various interest rates, but in somewhat less obvious ways. moreover, these tools contribute to growth in the rba's balance sheet, and result in important compositional changes in terms of the type and maturity of instruments held on our balance sheet. [ 2 ] hence, examining the balance sheet is a complementary way of assessing the stance of monetary policy. i'll consider each of these types of policy tools in turn. interest rate tools – it's not just the cash rate target that matters the reduction in the cash rate target, by 50 basis points to 25 basis points in march, pulled down the short end of the yield curve. that was straightforward. more novel was the use of forward guidance and the three - year yield target. the board wants to see labour market conditions that are consistent with inflation being sustainably in the 2 to 3 per cent target range. and it will not increase the cash rate until actual inflation is sustainably in the target range. [ 3 ] this forward guidance has contributed to interest rates being lower than otherwise, as rates across the economy depend, among other things, on expectations of future cash rates. this effect is being reinforced by the bank's three - year yield target. by committing to keep the threeyear australian government bond yield at around 0. 25 per cent, we have been directly affecting the interest rate at this point on the yield curve. the effect of the resulting changes in the short end of the yield curve on other financial market rates and prices is standard. lower risk