banks do not want to hold more than necessary. as such, a build - up in exchange settlement balances makes banks more eager to lend funds, and this pushes market interest rates down. the job of domestic markets department is therefore to ensure that the aggregate supply of exchange settlement balances is sufficient for the cash market to clear each day at the target cash rate. as can be seen from graph 1, the level of exchange settlement balances necessary to achieve this is typically around $ 700 - 800 million. however, for various reasons, there are times when banks need more, or less, cash. in these cases, the reserve bank responds by adjusting the amount it provides, in order to equilibrate demand and supply. it does this by buying securities to increase the supply of exchange settlement balances and selling securities to reduce the supply. these transactions may be either outright purchases or sales, or repurchase agreements which involve the sale of a security with an undertaking for details of the reserve bank ’ s market operations see www. rba. gov. au / marketoperations /. to repurchase it at a future agreed date and at an agreed price. in recent years, the reserve bank ’ s operations have been predominantly by way of repurchase agreements. graph 1 it is worth noting that the range of securities that the bank is prepared to deal in has been widened over the years. ten years ago, the bank only dealt in commonwealth government securities, but in response to the diminished supply of these securities and in recognition of growing markets in other securities, the bank over the years has added semi - government securities, bonds issued by international organisations and australian bank bills to the list of securities in which it is prepared to deal. international practice by central banks in this regard is quite varied : some central banks take a narrower range of securities than the reserve bank ; others take a broader range. there has, however, been a general tendency over the years for central banks to widen the range of securities in which they are prepared to deal. over time, the reserve bank has also widened the range of counterparties with which it is prepared to deal. currently, it deals with any holder of securities that is able to settle its transactions electronically through the dedicated rits settlement system. in this regard, the reserve bank is at the more liberal end of the international spectrum. many other central banks limit their dealing to banks or selected groups of primary dealers. the daily routine in market operations is fairly straightforward

. the fed, for example, cut the penalty rate on its discount window from 100 points to 50 points in order to lessen the cost of emergency funding to banks. some central banks also widened the range of securities in which they were prepared to deal. none of these measures was intended as a change in monetary policy settings and no central bank has reduced its interest rate target. neither should these measures be seen as an attempt to “ bail out ” banks or markets. rather, the measures have been technical operations aimed at breaking up the log jams in money markets and encouraging funds to flow again, in order to prevent monetary conditions becoming tighter than the settings that had been determined by the central bank monetary policy committees and boards in the various countries. the operations have restored some degree of calm to markets but conditions have not yet returned to normal. notably, yields on asset - backed commercial paper as yet have not fallen, indicating a continuing high degree of nervousness among investors. yields on us treasury bills have reversed some of their earlier fall, but still remain unusually low, again indicating a continuing strong risk aversion among investors. on the other hand, share markets in many countries have recovered strongly and some of the earlier exchange rate moves have also been largely reversed. the australian situation despite the fact that australian banks are in very sound condition and have been experiencing minimal credit losses, they were nonetheless affected by the spread of the global money market turmoil. on the morning of 10 august, banks started telling us that they were noticing a reduced flow of funds through the market. the cost of raising funds in global markets through swaps had risen noticeably, putting more pressure on domestic funding sources. yields on banks bills had jumped sharply overnight, and libor rates by even more ( graph 9 ). the reserve bank decided to supply more than the usual $ 700 - 800 million of exchange settlement funds, so that the overnight interest rate would not rise above the target set by the board in early august. those operations were successful in maintaining the cash rate at the 6. 5 per cent target, though other short - term market interest rates remained unusually elevated. since then, the bank has continued to supply whatever amounts of exchange settlement balances were necessary to keep the cash rate at the target. in the process, balances rose to a peak of $ 5. 5 billion in the middle of last week, the highest level for some years, though some of this has been reversed recently. the bank also skewed its market operations