declines up to that point, the bank's balance sheet will still be at least twice as large as what it was just prior to the pandemic. it will decline gradually thereafter, with bond maturities of between $ 35 billion and $ 45 billion every year for some time. 7 / 11 23 / 05 / 2022, 13 : 03 from qe to qt – the next phase in the reserve bank's bond purchase program | speeches | rba graph 5 one of the consequences of the bank's bond purchase program, and other policy measures adopted in response to the pandemic, is the abundance of exchange settlement ( es ) balances. [ 5 ] these are held by commercial banks ( and other financial institutions ) at the reserve bank and are used to settle transactions between banks. banks can also lend them to others in the overnight cash market, with those transactions determining the cash rate. as expected, the abundance of es balances led to a noticeable decline in the demand to trade cash overnight. it has also been unsurprising that the cash rate has traded slightly below the cash rate target since late - march 2020 ( graph 6 ). while es balances will decline as the various monetary policy measures adopted during the pandemic unwind, as discussed, that process will take a number of years. 8 / 11 23 / 05 / 2022, 13 : 03 from qe to qt – the next phase in the reserve bank's bond purchase program | speeches | rba graph 6 recently, the board considered options to reduce es balances more quickly. [ 6 ] if we were to do that, banks would have more of an incentive to borrow funds overnight, since their es balances would once more become relatively scarce. hence, such a change would encourage more trading in the overnight cash market, with the cash rate trading closer to, and eventually around, the cash rate target. however, the benefits of reducing es balances quickly were judged to be modest compared with the risks, including the potential to create volatility in a range of financial markets. moreover, while the abundance of es balances affects the behaviour of the cash rate relative to the cash rate target, it does not impair the ability of the bank to achieve the desired stance of monetary policy via adjustments to the cash rate target and the rate paid on es balances. in particular, because es balances will remain abundant for some time, the cash rate will tend to be

23 / 05 / 2022, 13 : 03 from qe to qt – the next phase in the reserve bank's bond purchase program | speeches | rba speech from qe to qt – the next phase in the reserve bank's bond purchase program christopher kent [ * ] assistant governor ( financial markets ) kanganews dcm summit sydney – 23 may 2022 introduction it is great to be here in person. last year at this event, i discussed the bank's term funding facility ( tff ). today, i'm going to focus on the bank's bond purchase program. at its meeting earlier this month, as well as raising the cash rate target, the board decided not to reinvest the proceeds from bonds as they mature from the bank's portfolio. this signals the next phase in the bond purchase program. the initial phase in which the bank built up its stock of bond holdings is often referred to as ‘ quantitative easing ’, or qe for short. that phase ended in february this year. we have now entered the phase known as ‘ quantitative tightening ’, or qt. by allowing our bond holdings to gradually diminish over time as they mature, the initial stimulatory effects of those holdings – namely, downward pressure on government bond yields and the australian dollar exchange rate – will gradually unwind. in my presentation today, i'll explain the reasoning behind the decision to begin qt. i'll then discuss some of the implications of qt for financial conditions, and explore what it means for the bank's balance sheet and the operation of monetary policy through the cash rate. but first, i'll briefly recap the qe phase of the program. background the bank introduced the bond purchase program in november 2020 to provide additional support to the australian economy in the early and still very uncertain stage of its economic recovery from the covid - 19 shock. this was a new element to the package of policy measures adopted at the outset of the pandemic. the very low cash rate target was already anchoring the front end of the yield 1 / 11 23 / 05 / 2022, 13 : 03 from qe to qt – the next phase in the reserve bank's bond purchase program | speeches | rba curve. the bank's forward commitment on the cash rate and the three - year bond yield target were tying down the yield curve a few years out. in this context, the bond