The Reserve Bank of Australia (RBA) has provided the banking sector with a significant liquidity boost on the overnight money market, purchasing bank assets through repurchase (repo) agreements totalling $8.8 billion – well above the daily average.
Over 60 per cent ($5.6 billion) of the transactions involved the purchase of transaction terms of 95 days.
This follows a similar move from the US Federal Reserve following President Donald Trump’s ban on travel from Europe in light of the coronavirus (COVID-19) outbreak.
President Trump’s decision sent ripples through international markets, including Australia, prompting traders to sell assets and strain liquidity in credit markets.
RBA governor Philip Lowe hinted at providing the banking sector with liquidity support following the monetary policy board’s decision on the official cash rate to a new record low of 0.5 per cent earlier this month.
“Australia’s financial markets are operating effectively, and the bank will ensure that the Australian financial system has sufficient liquidity,” Mr Lowe said.
The RBA’s response to demand for additional liquidity from Australia’s banking sector also followed Prime Minister Scott Morrison’s release of a $17.6 billion stimulus package to help support the domestic economy as it grapples with economic side effects of COVID-19.
The RBA will now conduct repo operations of six months maturity or longer at least weekly as long as the market conditions warrant a response. It will also continue to conduct one-month and three-month repo operations until further notice.
“Australia’s financial institutions, market participants and market infrastructure providers have undertaken substantial investments in their operational capability to deal with the effects of the virus,” the Council of Financial Regulators said in a statement.
“At the same time, trading liquidity has deteriorated in some markets, and financial institutions are having to adjust to a more volatile environment. The financial regulators are in regular contact with financial institutions, market participants and market infrastructure providers.”
The announcement comes as ASIC issues directions to a number of large equity market participants requiring them to limit the number of trades executed each day until further notice.
About the author
