Two-week term deposits on offer from RBA

The Reserve Bank of Australia will undertake occasional auctions of short-term term deposits in a bid to drain funds from the market and thus maintain the cash rate target at its target.

The revived stress in interbank markets worldwide, which is playing out in a mild way in Australia, has caused balances in exchange settlement accounts to skyrocket once again.

The RBA, and banks, have allowed ES balances to hover at close to $7 billion over the last week or so, slightly higher than very high levels that emerged during earlier periods of stress in each of August 2007, December 2007, March 2008 and June 2008.

The RBA will conduct the first term deposit auction on Monday for 14-day paper.

"Subsequent auctions will be conducted periodically as required for liquidity management purposes," according to the RBA.

And while the RBA is acting to drain liquidity from the market it is simultaneously seeking to inject it, though this time with US dollars.

The RBA said yesterday it agreed to a US$10 billion swap line with the US Federal Reserve "to provide US dollar liquidity in Australia in exchange for Australian dollars."

The swap "serves to alleviate a shortage of US dollar liquidity which has affected market participants around the world including in the Asia-Pacific time zone," according to the RBA media release.

The RBA will undertake a first auction for 28-day, US dollar paper tomorrow.

Central banks in Denmark, Norway and Sweden entered into similar arrangements, which complement the US dollar liquidity injection being engineered by other central banks.