Insight: RBA ES Rate When Cash Rate Target Is 10bps – Zero, 1bp, 5bps or 10bps?

By Sophia Rodrigues*

There is a high degree of certainty around most of the monetary policy decisions the Reserve Bank of Australia will announce at the November board meeting but one decision where there is some uncertainty is the rate on Exchange Settlement balances.

The RBA will lower the cash rate target to 10bps from 25bps. The question is whether the ES rate will be maintained at 10bps or lowered to 5bps, 1bp or even zero.

What was always clear is the ES rate will be lower than the cash rate target. So, retaining it as 10bps is unlikely and hence that option can be crossed out.

The option of no remuneration on ES balances could also be crossed out because at least at this stage, the RBA would want banks to earn something for their excess balances.

That leaves 5bps or 1bp on the table.


Initially it seemed a cut to 5bps is more likely, and while it still remains likely, there is now a higher probability the RBA would opt for a cut to 1bp.

To stress, this decision is not so clear-cut because the RBA is still trying to work out the merit of 1bp over 5bps.

A key input into this decision-making is answer to the question: Is it the level of cash rate or the spread over the ES that provides enough incentive to a bank in the interbank overnight cash market to lend?

In recent months, it has become clear that in an environment of ample liquidity, the actual cash rate would trade around 3bps over the ES rate.

So, if the ES rate is 5bps the cash rate would settle around 8bps. If it is 1bp, the cash rate would be 4bps.

  1. Would 4bps cash rate (when ES is at 1bp) provide less incentive to trade in the cash market versus 8bps (when ES is at 5bps)?
  2. Or do both provide equal incentives because the spread over ES is the same?

If the answer is number 2, the RBA would lower the ES rate to 1bp, and it appears this is a more likely outcome.

Otherwise it would be 5bps.


One factor that is unlikely to be part of this decision-making is the possibility that BBSW might go into negative if the ES rate is at 1bp.

Assistant Governor Chris Kent said on Tuesday that even if the BBSW goes into negative, it wouldn’t go much below zero.

His comments suggested the RBA is not concerned about such an outcome.

In any case, the RBA is unlikely to view a negative BBSW as a problem because it is a wholesale rate, not retail.

It might even welcome it because it would lower funding costs for banks and is another way its actions would deliver easing in the economy.

*All views, opinions and insights are those of Sophia Rodrigues, an RBA watcher and reporter and guest contributor to InTouch Capital Markets