Changes To OMOs Outlined

RBA Assistant Governor Kent outlines alterations to the RBA’s OMOs in his latest address:

• “The interest rate on OMO repos will change to a floating rate, which at this stage we plan to base on the average cash rate target prevailing over the term of the repo. Some other central banks already use floating rates in their liquidity operations, including the Bank of England and the European Central Bank. Before we adopt floating rate repos, the Reserve Bank is looking to hear from market participants on the extent of adjustments that may be required to their systems to accommodate floating rates. Hence, we will allow for an appropriate transition period before making this change.”
• “In the meantime, the Bank will continue to apply a fixed hurdle rate for OMO. However, this hurdle rate will change from the current cash rate target to the rate on term-matched overnight indexed swaps (OIS) plus a modest spread. Initially this spread will be around 5 basis points, but subject to change depending on market conditions. The Bank will post the relevant hurdle rate for each preferred term with the announcements of our OMO dealing intentions.”
• “The maximum tenor of OMO repos will typically be four weeks, although longer terms may be offered if and when warranted by market conditions.”
• “The shortening of OMO tenors will take effect immediately. Setting the hurdle rate as a spread to OIS will be effective from 30 March 2022; the cash rate target will remain the OMO hurdle rate until then. As already mentioned, the timing of the change to floating rate repos will be announced after we receive feedback on this aspect of the plan; we'll be in touch with relevant market participants in due course.”
• “The operational changes that I have outlined today do not provide any guidance on the future path of monetary policy. Rather, they will ensure that OMO remains fit for purpose as liquidity conditions, the economic outlook and the Bank's monetary policies evolve.”