Reserve Bank of Australia

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Reserve Bank of Australia
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Australian Monetary Policies

• The Reserve Bank of Australia (RBA) is
  responsible for formulating and implementing
  monetary policy. The Board's obligations with
  respect to monetary policy are laid out in the
  Reserve Bank Act in 1959.
• The Bank's 'charter', says "It is the duty of
  the Reserve Bank Board, within the limits of its
  powers, to ensure that the monetary and banking
  policy of the Bank is directed to the greatest
  advantage of the people of Australia and that the
  powers of the Bank ... are exercised in such a
  manner as, in the opinion of the Reserve Bank
  Board, will best contribute to
• 1. the stability of the currency of Australia
• 2. the maintenance of full employment in
  Australia
• 3. the economic prosperity and welfare of the
  people of Australia.

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Goals of RBA

• Right average inflation rate is to target for an
  average of 2 - 3
• Short term rate, overnight fund rate aim around
  6.0
• RBA believe higher inflation rate is harmful to
  economic performance and growth.
• Since 1993, RBA monetary policy aims to achieve
  this over the medium term and, subject to that,
  to encourage the strong and sustainable growth in
  the economy. Controlling inflation preserves the
  value of money. In the long run, this is the
  principal way in which monetary policy can help
  to form a sound basis for long-term growth in the
  economy.

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How are Monetary Policy decisions made?

• Analysis of statistical and liaison information
• Thousand domestic and international data series
  are routinely tracked
• Count 16 privately compiled Australian business
  surveys
• Board meeting, held on every first Tuesday of the
  month

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How is Monetary Policy Implemented? Part 1

• In 1970s deregulation period, monetary policy
  ineffectively operated through a mixture of
  financial-market operations and direct controls
  on markets and financial institutions.  EX.
  different interest rates, reserve requirements,
  balance-sheet restrictions

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How is Monetary Policy Implemented? Part 2

• Now the instrument of monetary policy is one
  single short-term interest rate after the
  unsuccessful monetary policy control which lead
  to shockingly high inflation rates before the
  1970 to early 80's.  The monetary policy changed
  during the mid-80's.

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How is Monetary Policy Implemented? Part 3

• Cash rate, short term interest rate, overnight
  fund rate, RBA money flow instrument, which the
  RBA uses to imply monetary policy to the public. 
  That is the number which everyone sits in front
  of the TV and wait to listen.

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How is Monetary Policy Implemented? Last

• The cash rate has a very strong influence on
  other interest rates like mortgage and business
  loan rates.  But since it is a single instrument
  in monetary policy making, it is much more
  transparent and easier to explain. Therefore,
  providing a very stable monetary market.

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Success after implementation

• In 1996 economy was booming and inflation was
  kept in check by inflation-targeting in
  anticipation of for the slow down of the economy.

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• In 1999 inflation was below target 1.8 and
  economy was still growing. Labour market was
  becoming tighter (influx of labour). But these
  factors were not forcased to remain the same so
  the RBA judged the expansionary policy already in
  place no longer appropriate.

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• Since the implementation of Inflation-targeting
  by the RBA, the inflation rate is consistently
  low. Additionaly the gross domestic product
  growth is robust and unemployment is reduced
  compared to that of prior of implementation.
  This policy is proving to be a success.