Recent change in the Reserve Bank of Australia interest rate
Reserve Bank of Australia Background
The Reserve Bank of Australia came into being on 14 January 1960 as Australia’s central bank and banknote issuing authority, when the Reserve Bank Act 1959 removed the central banking functions from the Commonwealth Bank to it. The Bank has the responsibility of providing services to the Government of Australia, which the profits of the Bank are transferred back to, in addition to also providing services to other central banks and official institutions.
About Reserve Bank of Australia
The Reserve Bank of Australia (RBA) was established as the Commonwealth Bank of Australia in 1911 and then split in 1959 with central-bank policy operations transferred into RBA, which was then established under the Reserve Bank Act.
RBA Tasks
The RBA has three tasks:
- Maintain stability of the currency of Australia
- Maintenance of full employment
- Ensuring the economic prosperity and welfare of the people of Australia
Is the Reserve Bank of Australia Independent?
The RBA has full operational independence surrounding its decision-making. It is, however, responsible to the government. The RBA Chair is required to testify to parliament both on monetary policy and regulatory matters. The Governor generally appears before the House of Representatives Standing Committee on Economics twice yearly.
The government could decide on a change to the mandate and could also look to gain greater influence on monetary policy through appointments to the Reserve Bank Board, although this is unlikely in practice.
RBA Monetary Policy Framework
The principal medium-term objective of monetary policy is to control inflation and this is the center-piece of the monetary policy framework. The RBA Governor and the Treasurer have agreed that the appropriate target for monetary policy is to achieve an inflation rate of 2-3% on average over the economic cycle.
RBA Monetary Policy Operation
The RBA adjusts monetary policy in order to achieve its target inflation rate of 2-3%. This can primarily be achieved by adjusting the level of interest rates. Interest rate policy works by changing the target for the cash rate and managing this rate through open-market operations, which then sets a base for interest rates in the economy.
Reserve Bank Board
Any changes in monetary policy are agreed through the Reserve Bank Board, which meets on the first Tuesday of every month except in January when there is no meeting. The Board is presented with the latest economic intelligence and forecasts by the bank staff who also make policy recommendations.
The Reserve Bank Board comprises nine members; The Governor, Deputy Governor and the Secretary to the Treasury are permanent members and there are also six non-executive members appointed by the Treasurer. The Governor and Deputy Governor are appointed for terms of seven years. The non-executive members are appointed for terms of five years, which can be renewed.
Following the meeting, the policy decision and statement are released with details of the economic assessment. The committee may also provide guidance on expected policy action at subsequent meetings.
Four times a year, the RBA will issue a statement on monetary policy, which assesses current economic conditions and the prospects for inflation and output growth. This provides more detail than the usual policy statements and the RBA tends to be more likely to adjust policy at the meetings where a monetary policy statement is issued.
RBA Meeting Minutes
The minutes of the monetary policy meetings meeting are released two weeks after the meeting has taken place. The minutes provide a more detailed record of the discussions, which took place and describe the thoughts of the Board. The minutes provide details of economic expectations and are useful in helping to determine potential future policy actions.
RBA Speeches
Members of the Reserve Bank Board and other senior bank officials often make speeches during their time in office. These are important in setting out their thoughts on the economy and potential trends in interest rates, especially as prepared comments are often followed by a Q&A; session. These remarks are often significant in moving markets with the speeches from the Governor notably important, especially when they are looking to signal a change in policy direction or make a specific point over policy.
Publications
The Reserve Bank publishes an annual overview of financial stability which looks at potential risks surrounding domestic and international financial stability. The RBA will make recommendations for actions it feels are necessary to improve the underlying outlook.
Statistics
The RBA produces a number of economic data releases relating to credit and money, although the Statistics bureau supplies most of the market-moving data. The RBA does provide closely-watched data on commodity prices.
Currency intervention
The Reserve Bank has the power to intervene in the currency markets and either buy or sell the Australian dollar if it feels there is a serious malfunction in market operations or that the exchange rate is substantially out of line with economic fundamentals. Actual intervention is rarely used but can have a very substantial market impact when deployed and the Reserve Bank frequently engages in verbal intervention with the rhetoric used to try and push the currency in the desired direction.