RBA says reserves still above demand amid shift to new liquidity system

SYDNEY, Aug 25 (Reuters) - Australia's ‌central bank ​said ​on Tuesday reserves in the financial system were still above underlying demand as it shifts to ‌a new system that will provide enough liquidity ⁠to banks while keeping rates anchored near the official cash rate.

In ‌a speech on the ample ‌reserves policy, Reserve Bank of Australia (RBA) Head of Domestic Markets David Jacobs said reserves have fallen by more ​than half since 2022 as the assets the central bank acquired under pandemic-era policies have matured, and that ⁠will continue.

However, funds can still be sourced cheaply in short-term repo markets and ​the use of the full-allotment open market operations under the new system is still modest, he ​added.

"Taken together, those indicators suggest that ‌we're not yet in an environment where the level of reserves is driven by demand," ⁠said Jacobs.

"When we might reach ample reserves ultimately remains highly uncertain. It could be some years away... But it could also ⁠be earlier if banks increase their demand or there are market ​frictions."

The RBA said in 2024 that it would shift to a system of ample reserves to set interest rates, in which banks' ‌demands for reserves are satisfied via open market repo operations at a price near the ‌cash rate target. That ended the old system of setting ⁠a floor for rates ‌with excess reserves and ​an exchange settlement (ES) rate.

(Reporting by Stella Qiu and Wayne Cole; Editing by Christian Schmollinger and Muralikumar ‌Anantharaman)

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