How a cash rate target is made to hold

A cash rate target is a sentence in a media release. The cash rate itself is a market outcome, measured in transactions between banks the Reserve Bank is not a party to. Nothing forces the two numbers to agree, and most of the Bank's market-operations work exists to make them agree anyway.

Key Takeaways

• Banks settle payments with Exchange Settlement balances held at the Reserve Bank, and the cash market is where those balances are lent overnight.
• The Bank pays 10 basis points below the cash rate target on them and lends overnight at 25 basis points above, bounding the market from both sides.
• Before 2020 the corridor was symmetric at 25 basis points either side, and the Bank kept aggregate balances deliberately small.
• In 2024 the Board endorsed an ample reserves system with full-allotment repurchase auctions, so supply now responds to demand rather than being rationed.
• The auction price rose from 5 to 10 basis points over the target effective 9 April 2025, and a seven-day term joined the 28-day one.
• The transition is unfinished: the Bank said in August 2026 that reserves are still above underlying demand.

What banks are actually trading overnight

Every payment between two Australian banks ends in a transfer between accounts those banks hold at the Reserve Bank. The Bank calls the quantity in them Exchange Settlement balances, describes them as used to settle interbank transactions and, because the central bank controls the supply of banknotes, as the equivalent of cash, and says banks hold them as a store of value and to make payments to each other.

That creates a market. A bank short of settlement funds at the end of a day borrows them overnight from a bank holding more than it needs, and the rate on those transactions is what the cash rate measures. To move that price, the Bank works on the two things it genuinely controls: what a balance earns while it sits still, and how many balances exist.

The corridor, and why it is no longer symmetric

Two institutional rates bound the market. The Reserve Bank pays interest on Exchange Settlement balances at a rate below the target, and stands ready to lend balances overnight at a rate above it. No bank lends into the market below what it can earn risk-free at the central bank, and none pays more than the central bank charges. Those two rates are the floor and the ceiling of what the Bank calls the policy interest rate corridor, and because both are defined as spreads to the target, the whole corridor moves when the target moves.

The current bounds are asymmetric: the deposit rate sits 0.1 percentage points below the cash rate target and the overnight standing facility rate 0.25 percentage points above it, a corridor 35 basis points wide. It was not always shaped that way. The Bank's June 2019 account of the framework describes a symmetric arrangement, with balances remunerated 25 basis points below the target and overnight lending available 25 basis points above. The floor moved when the Bank shifted to an excess reserves system in March 2020 and the Board narrowed that spread to 10 basis points, where it has stayed. From May 2025 the Board stopped announcing the Exchange Settlement rate separately; it announces the target, and the ES rate follows.

Scarce reserves, and the operation that had to be run daily

Under the framework that ran until 2020, the corridor did the work because balances were kept scarce. The Bank supplied roughly enough to meet underlying demand and no more: around $2 to $3 billion of surplus balances for cash market purposes in the June 2019 description, alongside a much larger pool held under open repurchase agreements to support after-hours payments. Government receipts and payments move settlement balances around every day, so the Bank offset those flows with daily open market operations to stop the supply swinging on its own.

Scarcity is what made the system tick. Because balances were rationed, banks had to trade with each other, and the marginal dollar priced inside the corridor rather than at either edge. The cost was that the Bank had to forecast the flows accurately, every day, or the cash rate would drift.

Full allotment, and what "ample" means

That approach was not resumed after the pandemic. In 2024 the Board endorsed an ample reserves system with full-allotment repurchase agreement auctions for open market operations, and the Bank has been explicit that this was a choice rather than an inheritance: it cites the benefits of readily available reserves for monetary policy transmission, banking system resilience and payments efficiency as the reason for not going back to scarce reserves.

Full allotment is the substance of it. The Bank does not decide a quantity in advance; it names a price and fills every bid at that price against highly rated collateral. Banks obtain reserves by selling securities to the Bank under an agreement to buy them back, which is what a repurchase agreement is, so the quantity supplied is whatever banks ask for. As the Bank puts it, demands for reserves are satisfied through open market repurchase operations priced near the cash rate target, and together with the floor provided by the Exchange Settlement rate those operations should keep the cash rate close to target. Supply responds to demand instead of the Bank guessing at it.

The price of that supply is itself a policy parameter, and it has already moved once. At the April 2024 announcement, weekly full-allotment repurchase agreements were offered at a 28-day term priced 5 basis points over the cash rate target. Effective 9 April 2025 the Bank raised that to 10 basis points and added a seven-day term. The stated reason was market health rather than policy stance: at only 5 basis points over the target, meeting a large increase in demand at the auctions risked crowding out private money markets at the margin.

So there are now three institutional rates, not two.

The Reserve Bank and APRA said jointly on 2 April 2025 that using that backstop is routine liquidity management and that both are comfortable with banks doing so - a facility nobody will touch for fear of how it looks is not a functioning ceiling.

What the Bank watches to judge whether it is working

Ample is a level nobody can observe directly, which makes the transition the interesting part. Settlement balances were around $200 billion in August 2026, after the Bank injected nearly $500 billion during the pandemic and then let those assets run off, more than halving the total. Bank survey responses in 2024 implied an ample level of roughly $100 to $200 billion; more recent responses put it nearer $70 to $100 billion.

By the Bank's own account in August 2026 the system is not there yet: reserves still look to be above underlying demand, they can still be obtained more cheaply in short-term repurchase markets, and outstanding balances at the auctions remain modest at between $20 billion and $30 billion. The signal the Bank has described watching for is a change of anchor, with short-term rates guided by the cost of obtaining reserves at the auctions rather than by the return on holding them. Standing facility use has picked up from almost nothing, reaching as much as $1 billion and seven transactions in the June quarter of 2026. The open repurchase agreement facility, a leftover of the older design, is being retired: the Bank announced on 25 August 2026 that it will cease from early 2027, because banks can now obtain reserves from the auctions instead.

Where to look next

The cash rate entry defines the instrument and works through what an overnight rate costs for a single night, and the cash rate page carries the published target. For who takes the decision this machinery implements, see whose forecast is in a cash rate decision; for where the target ends up in retail pricing, the home loan, savings and term deposit rate pages.

Sources

• Reserve Bank of Australia, The Framework for Monetary Policy Implementation in Australia, Bulletin, 20 June 2019 - the symmetric corridor that ran until 2020 of 25 basis points either side of the target, the surplus Exchange Settlement balances of around $2 to $3 billion held for cash market purposes, and the daily open market operations used to offset government flows
• Reserve Bank of Australia, The Future System for Monetary Policy Implementation, speech by Christopher Kent, 2 April 2024 - the Board's endorsement of an ample reserves system with full-allotment repurchase auctions, the description of demand being satisfied at a price near the target together with the floor provided by the ES rate, and the original weekly 28-day operations priced 5 basis points over the target
• Reserve Bank of Australia, The RBA's Monetary Policy Implementation System - Some Important Updates, speech by Christopher Kent, 2 April 2025 - the increase in the operations price to 10 basis points over the target and the addition of a seven-day term, both effective 9 April 2025, the reason given for the increase, the March 2020 narrowing of the ES spread to 10 basis points, and the cessation of separate ES rate announcements from May 2025
• Reserve Bank of Australia and Australian Prudential Regulation Authority, Joint Statement on Use of the RBA's Overnight Standing Facility, 2 April 2025 - that use of the overnight standing facility is routine liquidity management rather than a distress signal
• Reserve Bank of Australia, The Road to Ample - Towards a Demand-driven Liquidity Regime, speech by David Jacobs, 25 August 2026 - the 2024 choice of ample over scarce reserves and the reasons given, settlement balances of around $200 billion in August 2026 against nearly $500 billion injected during the pandemic, the survey-implied ample levels, the $20 to $30 billion of outstanding operations, standing facility usage in the June quarter of 2026, and the retirement of the open repurchase facility from early 2027
• Reserve Bank of Australia, Domestic Market Operations and Liquidity Facilities - the current parameters as published: the ES rate 10 basis points below the target, the overnight standing facility 25 basis points above, full-allotment repurchase auctions against highly rated collateral announced each Wednesday, and the discontinuation of open standing facility repos

Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.