Our monetary policy implementation tools
Our Financial Markets Department undertakes regular domestic markets operations to manage the settlement cash level and anchor short-term interest rates near the OCR. We are also able to implement extraordinary liquidity management operations and additional monetary policy tools, such as the Large Scale Asset Purchase programme.
The purpose of our domestic liquidity market operations is to either inject or withdraw liquidity from the banking system in order to ensure the settlement cash level is sufficient for payments and settlements requirements, and that short-term interest rates are anchored near the OCR.
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Standing facilities
The ORRF allows counterparties to borrow settlement cash from us at an interest rate of the OCR plus 0.50%. This helps to prevent short-term interest rates from trading above this level, as these counterparties have no incentive to borrow from market at a higher interest rate. In the ORRF, counterparties exchange approved eligible securities for settlement cash for one day.
The BLF allows counterparties to borrow specific New Zealand Government Bonds from us in exchange for settlement cash. The purpose of this facility is to prevent settlement failures if counterparties cannot source a bond in the secondary market. The BLF is priced at OCR minus 0.50%.
Tools
We transact in the FX forwards market to either inject or withdraw NZD cash in exchange for USD. We can transact an FX swap to lend NZD and borrow USD to inject liquidity and put downward pressure on short-term interest rates, if needed. Conversely, we can withdraw liquidity from the system by transacting an FX swap to borrow NZD and lend USD to put upward pressure on short-term interest rates.
We can offer repo or reverse-repo through auctions to either withdraw or inject liquidity into the banking system. We currently offer weekly operations for reverse-repo where we exchange cash for approved eligible securities, at a rate near the OCR. Repo operations are offered on a discretionary basis.
To mitigate the impact of government bond maturities on the settlement cash level, we can purchase soon-to-mature New Zealand Government Bonds. This facility works by spreading the increase in settlement cash from the bond maturities across multiple dates, rather than just the maturity date. We offer this facility in consultation with New Zealand Debt Management.
We can sell Reserve Bank Bills (RB Bills) to withdraw liquidity from the banking system. Offerings are at our discretion upon reverse enquiry with maturities out to a maximum of 1 year. RB bills can be a useful way for counterparties who do not have ESAS accounts to deposit NZD cash at the OCR.