The Reserve Bank of Australia is moving away from directly controlling the quantity of reserves in the banking system, Assistant Governor Christopher Jacobs said. The RBA is transitioning from a floor system, in which the central bank supplies ample reserves and manages their quantity to keep the cash rate at its target, toward a framework where reserve levels are largely determined by banks’ demand. Under the previous approach, the RBA actively managed exchange settlement balances, the reserves banks hold at the central bank, to maintain the cash rate. In the new system, banks will redistribute liquidity among themselves more actively, while the RBA will intervene mainly during periods of extreme volatility. The change is intended to make monetary-policy operations more efficient and reduce the need for large-scale open market operations. It is also expected to reduce the RBA’s balance sheet over time as the bank scales back bond holdings and other assets, stops reinvesting maturing securities and allows exchange settlement balances to decline. The process, sometimes called quantitative tightening, is intended to proceed gradually without disrupting market functioning. The cash rate target will remain the RBA’s primary policy tool, although short-term funding costs and monetary-policy transmission may fluctuate more as banks manage their own liquidity. Market participants are monitoring the effects on repo demand, the overnight index swap curve and liquidity in Australian dollar markets. The RBA will continue providing liquidity through standing facilities and has said the transition will be subject to regular assessments. The shift forms part of broader efforts to modernize the RBA’s monetary-policy toolkit, including potential work on a central bank digital currency and improvements to the payments system. The RBA has not set a fixed completion date, but the direction is toward a more market-based framework in which banks assume greater responsibility for liquidity management.