RBA steps in to inject $6.9bn in liquidity

The RBA has stepped in to add liquidity to the financial system in an attempt to calm pressure on markets.

The RBA has stepped in to inject liquidity into the Australian market. Picture: AAP

The Reserve Bank of Australia has added $6.91bn of net liquidity to the financial system via daily ‘repo’ repurchase agreement operations in an attempt to calm pressure on financial markets.

Central banks use the repurchase mechanism to buy and sell government bonds in order to control the amount of money available to the financial system.

The RBA added $8.835bn in of liquidity via its repo operations, whereas just $1.925bn in repurchases were maturing, resulting in a net addition of $6.91bn of liquidity injected into the system.

The RBA’s move comes amid increasing indications that companies are hoarding cash and fears that credit availability is looking increasingly crunched.

The RBA’s intervention came after both the US Federal Reserve and European Central bank made moves to cushion the blow of tumbling markets overnight.

At first, the RBA’s additional liquidity appeared to have helped the S&P/ASX 200 share index bounce from a four-year low of 4919 to an intraday high of 5095.

But the bounce was short-lived, with the ASX then falling to 6.8pc at 4946 as global markets continued to dive.

Overnight the Fed stepped up buying of short-term Treasury bonds. The Fed said it would make available at least $US2 trillion in short-term lending as a way to ensure that the Treasury market could function smoothly. It also intended to broaden its ongoing $US60 billion-a-month purchases of Treasuries to include longer-term bonds.

Like the ASX after it, US markets continued to fall after the central bank intervention, with the Dow Jones industrial average finishing 10 per cent lower on Thursday in the worst day for the index since the “Black Monday” crash of 1987.

The ECB, meanwhile, rolled out cheap loans for banks at an interest rates as low as -0.75 per cent, and stepped up bond purchases, including those of private companies. ECB president Christine Lagarde said the central bank wouldn’t act to support Southern European government bonds if they come under pressure.