22 September 2000

New liquidity management tool

The Reserve Bank today announced that, as from 25 September, it would begin using repos, offering bonds from its own investment portfolio in exchange for cash, in open market operations (OMOs).

Commenting on the announcement, Michael Reddell, Chief Manager, Financial Markets, said that: "This innovation is designed to enhance the flexibility of the Reserve Bank's OMOs. These operations are designed primarily to smooth out the impact of government spending and revenue."

"Until now, we have usually had to sell short-term Treasury bills when we needed to withdraw cash from the banking system. But buyers are typically reluctant to buy bills with terms much less than one month. Repos are often for much shorter terms, and adding them to our range of instruments will enable us to withdraw liquidity for periods as short as a day when that is what the patterns in government spending and revenue dictate," Mr Reddell said.

The Reserve Bank has used reverse repos - providing cash to markets in exchange for bonds - successfully for many years, both in OMOs and in providing intra-day liquidity to facilitate real-time gross settlement of wholesale financial transactions.

Technical Note:
Repos are repurchase agreements. A bank or other party purchases a bond from the Reserve Bank, in exchange for cash, and at the same time the parties agree on the price at which the Reserve Bank will repurchase the bond at some future date. The economic effect of a repo is similar to that of a secured loan, but the legal form is designed to strengthen the legal position of the party holding the bond in the event of a default.

For further technical details, click here.

For further information contact
Paul Jackman
Corporate Affairs Manager
Ph 04 471 3671, 021 497 418, home 04 938 8177, Jackmanp@rbnz.govt.nz