(RTTNews) - Friday, the Reserve Bank of Australia’s Assistant Governor said the central bank’s efforts to ease liquidity pressures in the domestic financial markets have been successful.

Speaking at the 2008 FTA Congress in Melbourne, Guy Debelle, Assistant Governor of Financial Markets said, “The framework for the Reserve Bank’s market operations has been very flexible and has served us well”.

He said the fact that the central bank has for a long time dealt daily with a wide range of counterparties across a wide range of maturities has allowed it to respond quickly and flexibly.

As the global credit crunch spread beyond the U.S. and Europe, the RBA had taken a slew of measures to ensure smooth flow of liquidity in the domestic financial system. Among others, the central bank pumped money into markets, widened the range of collateral and launched new term deposits.

Debelle said, “From early September, tensions in money markets increased significantly. Counterparty credit risk became paramount”. According to him, this was exacerbated by the failure of Lehman Brothers.

Responding to increased precautionary demand, the RBA initially hiked the supply of exchange settlement account balances from the level of A$750 million that had prevailed for a number of years at more than A$5 billion.

If the Reserve Bank had not increased the supply, the cash rate would have risen above the target set by the Reserve Bank Board as financial institutions bid harder for funds in an attempt to increase their cash balances, Debelle noted.

Demand for exchange settlements balances surged with the central bank accommodating it. The balances hit A$11 billion in mid October. Debelle said the central bank has subsequently reduced the ES pool as demand has eased.

The central bank official cautioned that the degree to which turnover in the cash market has been affected by the turbulence and by the heightened counterparty fears should not be overstated.

He pointed out that the daily turnover in the cash market has been relatively constant throughout and has been largely unaffected by the size of exchange settlement balances. Thus, he said, a crucial part of the financial system, which lies right at its heart, has continued to function well.

In September, the U.S. Federal Reserve and the RBA had established a US$30 billion swap facility to boost US dollar liquidity in the domestic financial markets.

“Overall, it appears this has had some success with conditions in the US dollar swap markets improving over the last few weeks, and the cost of US dollar funding declining to more normal rates”, Debelle said.

Despite such improvements in the situation, the central bank is continually reviewing all aspects of the operating framework to ensure consistency with the evolving nature of the domestic financial market, he concluded.

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Posted in Categories: Australia, Economy, Eurozone, Forex, Releases, USA.

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