Videos Functions and Activities

Role and Functions

The Reserve Bank of Australia is Australia's central bank. Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation's banknotes. The Bank also manages Australia's foreign exchange reserves and provides banking services to the government.

Transcript

Glenn Stevens, Governor (2006 – 2016)

I suppose the role that people most hear about is the monetary policy one, where we make a monthly decision about interest rates. And the main purpose of those decisions really is to try to preserve the stability of the value of money over time, a stable money is a foundation for a prosperous economy and it's really that simple. So that's the thing probably people hear about most frequently. But we actually do a lot of other things besides set that one interest rate.

For most people the closest connection to us that they probably have is they're carrying these around. We print these brightly coloured pieces of plastic and there's $60 billion worth of that floating around out in the community that is used for everyday transactions. So pretty much everybody is carrying that in their pocket every day of the week and that's their closest connection to us actually.

It's about many other things just other than the physical cash that you're carrying around, so one of those is the Reserve Bank runs the nations electronic payments system. We clear about $180 billion every day through that system of electronic transfers all of that goes across our books as the private banks settle with each other. That has to be run to a very high standard of reliability and efficiency.

We have a broad mandate for stability of the financial system, this is in a way hard to define precisely because usually you can only define what financial stability means by thinking about its absence. So in recent years we've seen in other countries an absence of stability, we've seen banks failing or under pressure, we've seen the system seize up in moments of crisis and our job is to try to prevent that happening by maintaining sound banks, sound financial institutions, well-functioning financial markets, and central banks generally, and the Reserve Bank is no exception, have always felt an obligation to try to foster that stability to the limits of our ability.

We are the Government's banker, most people if they've received a cheque from the Tax Office, if you're lucky enough to get a refund, or you've received a payment of a pension, a social security benefit, a payment from Medicare, all of these things are across accounts at the Reserve Bank, so we run those accounts on a daily basis and there are some 200 million or more electronic payments processed by the RBA every year, so quite a major player in that space.

We hold Australia's foreign exchange reserve assets, these are assets held offshore as custodian for the nation, so we hold them in United States dollars, Euros, some Yen, some Canadian dollars and recently some Chinese RMB. And these are held really against a rainy day, they're held in case one day a situation arises where we need to have access to foreign funds, there's about $40 billion available there and our job is to hold those essentially in trust for the nation, we're the owner, but we're holding them on behalf of the country.

A lot of people think of the Reserve Bank as an institution in Sydney and certainly that's where our Head Office is, but we maintain a presence around the State capitals on the mainland. We're the nation's central bank we're not just a Sydney institution, we're a national institution, our obligations are national not just Sydney, and we take that obligation very seriously.

Monetary Policy Framework

The Reserve Bank of Australia is responsible for Australia's monetary policy. Its monetary policy objective is defined as an ‘inflation target’ of consumer price inflation of 2–3 per cent, on average, over the medium term. To meet this, the Bank influences interest rates in the economy by setting a target for ‘the cash rate’. Influencing interest rates in this way affects the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation.

Transcript

Glenn Stevens, Governor (2006 – 2016)

If people come into the foyer of the Reserve Bank, and they're always welcome to do that here at Martin Place, you will see on the wall on the right hand side there's some letters etched into the black stone there, that are from our Charter, those words are from 1945, they haven't changed since, and they're about stability of the currency, the maintenance of full employment and the prosperity and welfare of the Australian people. Now they're very big, broad, fine sounding words, how do we put that into practice? Well the way we do that is we have a medium term target for inflation and we talk about holding CPI inflation to 2 to 3 per cent on average over time. In other words, preserving the value of money and that's very important, because a stable money is really a foundation for economic prosperity more generally. If we don't have stable money then whatever else we do we won't really be able to achieve broader economic prosperity. That framework's been in place since the early 1990s, we have hit the target over that 20 year period, the average inflation rate's pretty close to 2.5 per cent, so we regard that as successful by the terms of the definition that we set ourselves and I think that's made a big contribution to economic stability more generally and I don't think it's an accident that that period of fairly low predictable inflation has coincided with pretty good sustained growth in the economy.

The target is a medium term one, so there's a little bit of flexibility over the short term, and I think experience shows that in trying to do economic policy and trying to control inflation there really isn't an ability to fine tune these things over very short periods of time, you have to take a more medium term perspective. We've always thought that and I think experience shows that that's the right way to do it, and as I say we've managed to achieve that target fairly well over quite a long period of time now.

Sometimes things happen, economists refer to these things as shocks which just means they're events which are not forecastable and not controllable. Things come along it might be a rise in global oil prices because there's military tension in the Middle East, it could be the celebrated banana price rise because the crop's been damaged by a cyclone, it could be some government policy that raises or lowers the cost of medical care, so these things come along and they affect the measured inflation rate over a short period, and we can't stop that occurring, we can't control that, but the key thing is to have inflation come back to the target over time and the policy decision is really about trying to configure the interest rate setting so that we can be pretty sure that inflation will come back over time and one of the key things that helps us do that is if people's expectations about inflation in the future are well anchored near the target, that actually feeds through to their behaviour, to the behaviour of wage setting, to the behaviour of business and the way they set prices, if they behave consistently with the target that actually helps us achieve it. So one of the things we watch is whether those expectations are indeed well anchored or not and that helps us to work out what response we might need when inflation starts to go off course.

While historically we've had this board for a very long time, since the early 1950s, it's always been a board where the Governor is the Chairman but we have a majority of outside people drawn from industry, from academia, from sometimes other parts of society who bring a common sense perspective, they bring their own commercial or academic experience and they apply a filter of the, I suppose you could say, the educated, informed, reasonable person to the judgements that we on the inside want to bring to the decision and for us to get the decision that we think is right we have to convince them. And that's as it should be. That's a strong filter. I think our board, although unusual amongst other boards, there are very few if any other central banks that have this kind of a board, but in our country, for this kind of filter to be applied to the decision process, I think adds to the credibility, to the legitimacy that the whole process has in the eyes of ordinary people and that's very important. So it's worked quite well for 60 years now.

Domestic Market Operations

As part of its responsibility for monetary policy, the Reserve Bank Board sets a target for the cash rate. This is the rate at which banks borrow from and lend to each other on an overnight, unsecured basis. The rate is determined by the demand and supply of exchange settlement balances that commercial banks hold at the Reserve Bank. Through its open market operations, the Reserve Bank alters the volume of these balances so as to keep the cash rate as close as possible to its target.

Transcript

Guy Debelle, Assistant Governor (2007 – 2016)

The Bank has two roles: it operates in the domestic market and it operates in international markets. The Reserve Bank Board sets a target for the cash rate at its monthly meetings and it's the job of the domestic operations to make sure that target is actually achieved. It does that by adjusting the supply of funds in the interbank market, so that the banks have an incentive to lend their money between themselves at the cash rate. So we control the supply; they have the demand, and the net outcome of that is the price.

To adjust the supply of liquidity in the market, the Bank operates in the market by either buying or selling securities, which is the stuff you read in textbooks. But mostly what we do is actually something called a repo, which is we lend or borrow money from the banking system against collateral (normally a government security), but also bank paper as well. So we inject money into the system by lending to a bank and, in return, they provide us with a security.

We operate in the market every day. We do it at 9.45 in the morning, so at 9.30 am we publish on the news services what our intention is that day: we tell them how much liquidity we're going to inject, what we intend to inject into the market, and at what term we're going to do. So we don't lend overnight generally – almost never. We lend for a period of time – a month or two. The banks, or any other participant, can ring us back with their bids by 9.45 am each day. It's an auction, so whoever gives, or offers us the best price, is the one we accept. Normally we accept multiple bids and we also do, since last November, a second round of open market operations, potentially each day at around 5.10 pm in the day, about one in every two or three days. With the move to fast settlements now, there is a requirement that the liquidity position in the market at the end of the day is right where we want it to be.

It's because we operate in the market every day that we get to assess the demand of counterparties for liquidity. As I said, we control the supply, they have the demand, and we can see how much they're demanding. If they're demanding more, we can increase the supply to make sure that the price, which is the cash rate, stays where the Board wants it to be. But also because we're interacting with market participants every day in doing these transactions, it gives us a lot of insight into the conditions in the market because we're actually a participant in the market ourselves.

International Market Operations

The Reserve Bank undertakes transactions in the foreign exchange market on a regular basis. Many of these transactions arise out of the provision of foreign exchange services to clients, with the Australian Government the Bank's largest client. Transactions are also undertaken in managing Australia's foreign currency reserves. Foreign currency reserve assets are held on the balance sheet of the Bank, with the currency allocation, asset allocation and interest rate risk on investments managed against benchmark targets.

Transcript

Guy Debelle, Assistant Governor (2007 – 2016)

The Bank has two roles: it operates in the domestic market and it operates in international markets.

The Bank owns the country's foreign exchange reserves, they are actually on our balance sheet, and we manage them on behalf of the country.

We operate in the foreign exchange market for two reasons. One is to give us the capacity to intervene in the market when conditions require. So, for instance, in 08/09 conditions in the foreign exchange market here and globally deteriorated; liquidity was very sparse and we stepped in to provide liquidity into that market. The intervention episodes are generally fairly few and far between. We haven't intervened or felt the need to intervene in the market since 08/09.

We also operate in the FX market every day of the week, because we do the Government's foreign exchange transactions for them. So every day, if the Government needs to pay some bill in foreign exchange, we'll provide money to an embassy offshore. We provide that money to the Government out of the foreign exchange reserves. We then go back into the market and replenish the foreign exchange reserves back to where we want them to be.

So the idea in managing the reserves is that we hold reserves to have sufficient liquidity for us to be able to intervene in the market when we need to. Normally we're not going to get a lot of advance notice of that, so the reserves have to have a certain degree of liquidity. Besides that, we aim for a diversity across the portfolio and that the portfolio has only the highest credit.

We hold roughly half of the portfolio in US dollars, about 30 per cent in Euro and then some in Japanese Yen, the Canadian dollar and the RMB, which we've only started investing in relatively recently.

We have a global operation. All our domestic operations are done out of the Sydney office, but we have offices in New York and London to manage the foreign exchange reserves portfolio. So the US dollar and the Canadian dollar portfolio are managed out of New York, the Euro portfolio is managed out of London, and then the Yen and RMB portfolio and the oversight of the portfolio as a whole is done out of Sydney.

So just like in the domestic market, we're transacting in those global markets every day. For instance, we hold about half of our portfolio as I said in US dollars; most of them are in US Treasuries, so we're dealing in the US Treasury market every day which gives us direct insight as to how the market is functioning. Similarly, in the FX market, because we're transacting in the market every day of the week, that gives us a good insight into how conditions are unfolding in that market.

Financial Stability

Maintaining the stability of the financial system is a longstanding responsibility of the Reserve Bank. A stable financial system is one in which financial institutions, markets and market infrastructures facilitate the smooth flow of funds between savers and investors. This helps to promote growth in economic activity.

Transcript

Luci Ellis, Head of Financial Stability

Financial stability matters because if we don’t have it, the economic and social cost can be huge. The human cost of financial crises is enormous, as we've seen in a whole lot of countries over recent years. People lose their jobs, businesses fail, people lose their life savings – it’s a real economic cost, not just about the financial sector.

There are a lot of ways we can help promote financial stability. There are things we can do in terms warning about risks. There are things we can do working with the other regulators in Australia to push against the kind of risk-taking that could cause a problem later on. We can advise government about possible policies across the regulatory and tax and all the other areas that the government can respond to. We can work with international regulators to help build global rules for banks, for insurance companies and other parts of the financial sector to make the financial system resilient to things that could happen to it from outside the financial system and also to work against the financial system creating risks within themselves that could hurt the real economy.

The Reserve Bank isn’t the regulator of the banks or insurance companies or the other parts of the financial system. We have some specific powers to regulate certain kinds of financial infrastructure, the platforms that people use to trade money amongst themselves and to settle their debts, but we’re not the regulator of the banks, that’s APRA. What we can do though is work closely with APRA. I like to see the team in Financial Stability Department as being the economists on tap for APRA. We’re there to analyse the risks, to surveil everything that’s happening in the financial system and also in the customers of the financial system, the households and businesses – whose financial activity could expose them to risks that they perhaps might not fully understand or appreciate or for which they might be accepting quite low compensation. And all of those things are things we would be looking for and working with APRA in terms of formulating policies that might be helpful in leaning against those risks.

We also do a lot of communication. I like to say that we have a telephone and a microphone, the telephone’s for calling APRA or calling ASIC, the microphone is for speaking to the general public and to the banks and to other people who need to be informed about the risks that might be building up and that perhaps they may want to do something about and respond to.

The Bank also has an important role in crisis management. We have to respond if financial instability does occur. Again all of the regulators in Australia get involved in their various responsibilities, in terms of responding and mitigating some of the consequences. Among the Bank's responsibilities would be to provide liquidity to the financial system. The Reserve Bank is the provider of cash and liquid assets and so if there are institutions that have good assets but they just would not get a good price if they had to sell them today, they can instead present them to the Reserve Bank and get cash, get money in their account with the Reserve Bank and be made liquid again. That’s a very important role of central banks and has been for many centuries.

The Bank has to work very closely with regulators, other regulators both in Australia and overseas. In Australia there is the Council of Financial Regulators, which includes ASIC and APRA as well as Treasury, and the Governor of the Reserve Bank chairs that group. And that's where the Australian regulators work together to formulate crisis management policy, to help advise government about issues to do with financial stability and financial regulation. And it’s where we can nut out our joint position so that all the policies that are implemented in the Australian financial sector are well thought through and take all of the different sectors in the financial system into account.

Internationally we also do a lot of engagement, a lot of meetings, we spend a lot of time in planes going to those meetings and there’s an array of different international organisations that the Reserve Bank participates in. These are all international agencies where various countries come together and formulate common rules because things that go wrong in one country, as we’ve seen in recent years, can really harm the economies and the financial systems of other countries that are in many ways innocent bystanders. So we all have to work together to ensure high standards of regulation and supervision in the financial system. We all have to work together to detect the risk that might be building up that could affect each other.

It really matters to the Australian people if something goes wrong abroad because of what that can do to the world economy and therefore affect Australia.

Payments Policy

A safe, competitive and efficient payments system is essential to support the day-to-day business of the Australian economy. The Payments System Board of the Reserve Bank has a mandate to contribute to promoting efficiency and competition in the payments system, and the overall stability of the financial system.

Transcript

Tony Richards, Head of Payments Policy

The Bank has got a number of roles in payments systems. One important one is that we operate the system that banks use to transfer funds between themselves – and there's very high values going through that obviously, something like $180 billion a day on average through that system. And the other important one that I'd like to talk about is the Bank's role as regulator of the payments system, and that's done by the Payments System Board. The Bank has two Boards, there's the Reserve Bank Board and the Payments System Board.

The Payments System Board has been given the responsibility for competition and efficiency of the payments system and also for controlling risk and promoting the overall stability of the financial system.

Our work on retail payments emerged from the Wallis Inquiry which found that the cost of payments in Australia were quite high and they gave the Bank a mandate to improve the competition and efficiency in the payments system. So our early work was with respect to the payments card systems, where there were a number of fees that weren't particularly transparent. There were also restrictive rules on merchants and so the Bank has put in a series of standards or regulations to improve the competition and efficiency in the card systems.

We've also done some work on the ATM system where the emphasis has been on making the cost of ATM transactions transparent to customers (rather than finding out about the cost of it a month later on their bank statement), and also ensuring that the owners of ATMs are able to charge and continue to provide the services.

The Bank has a responsibility to ensure that licensed clearing and settlement facilities operate in a way that promotes the stability of the Australian financial system. The Bank has put in place standards and it does annual assessments against those standards. What we do is we have ongoing dialogue with the clearing and settlement facilities. We understand their business models, we understand the risks they're taking, the new products they're offering and once a year we do an assessment of those clearing and settlement facilities.

The New Payments Platform is an exciting project that is building a new centralised or hub-based infrastructure that all financial institutions will connect to. And among other things, it's going to facilitate real-time payments between households. So, for example, if I was wanting to sell my car on a Saturday afternoon privately, I'd be able to make sure that the money had arrived in my account from the buyer before I hand over the keys.

So the Bank has been working closely with the industry. It's a collaborative project and the industry participants will also be building their own apps et cetera to offer new and improved payments services to their customers.

Currency

The Reserve Bank is responsible for all aspects of the production and issuance of Australian banknotes. It works to ensure that the public has confidence in their banknotes as a means of payment and a secure store of wealth. Australia's banknotes are printed on a polymer (plastic) material and incorporate a range of security features that are easy for the public to recognise but difficult to copy.

Transcript

Michele Bullock, Assistant Governor

The Reserve Bank actually is responsible for issuing Australian banknotes, but we're also responsible from – all the way from production through to circulation and then withdrawal and ultimate destruction of the banknotes, and the purpose of that is to ensure that the Australian public can be confident in the banknotes and use them in transactions and as a store of value.

It's only been the Reserve Bank's job since earlier in the 1900s. In fact, prior to Federation the commercial banks printed their own banknotes and then eventually that power passed to the Commonwealth and then eventually to the central bank.

Coins actually aren't printed by the Reserve Bank; coins are the responsibility of the Mint which is based in Canberra.

So the first thing about our Australian banknotes is they're plastic and this is quite unusual and it was the first time in the world really that a plastic banknote had been issued, prior to that banknotes were always issued on paper. And that actually is a very important security feature. It does two things. It means it's harder for people to reproduce a banknote on plastic and, in addition, they're much more durable, they last longer in circulation, so that's a really key thing about Australian banknotes.

The design of the banknotes is based on the plastic and it's also got security features in it. The first as I said is plastic, that's a very important thing so it should – if you scrunch it up it should spring back or if you try to tear it, it shouldn't tear easily. But there's also the clear window at the bottom of all the banknotes, and that shouldn't be a stuck on piece of plastic, that should be integral to the banknote.

There's a number of other security features as well. The printing needs to be – you need to see very, very sharp printing and in fact on every banknote there's this little tiny micro printing and if you get a magnifying glass out or if you have really good eyes you might be able to see it, it's very, very precise printing and you can't reproduce that in a counterfeit.

They are quite colourful and that's a very deliberate decision. For people with vision impairments who perhaps don't have very clear vision, the bright colours help them to distinguish between the banknotes. There's a number of other things which help them as well. All the banknotes are a slightly different size, they get longer as they get higher value and they've got big bold numerals on them as well, again to assist people with vision impairment.

There's around about 1.3 billion banknotes in circulation and that in total value is around about $61 billion.

Now counterfeiting isn't a problem in Australia and I think that reflects the fact that we've had such a secure banknote with the plastic banknotes since the mid 1990s so it's a long time. But it isn't a problem. However, we always want to make sure that we're keeping one step ahead of the counterfeiters. Technology these days, the price is coming down, it's getting easier to access this technology and what we want to do is make sure we just stay one step ahead.

So the banknote really is, I've often heard it said, the business card of the country. It's what people see when they come into the country, it's the first thing, so you want something that reflects your cultural heritage or history and in our case what we have on our banknotes from our 10 upwards is we have two people, a male and a female on each side of the banknote and those people have a story behind them, and when you look at the banknote you will see pictures which represent that person's story in our history.

The five dollar is a little different because it has Parliament and the Queen on it, so it more represents democracy, Australia as a democracy.

Banking

The Reserve Bank provides a range of banking services to the Australian Government and its agencies, overseas central banks, and official institutions. Principal amongst these is management of the Government's core accounts. The Reserve Bank also provides transactional banking facilities to various Australian Government agencies.

Transcript

Lindsay Boulton, Head of Banking

Many people are aware of the Reserve Bank's role in setting monetary policy, and in particular in the cash rate target announcements that occur every month. What many people aren't aware of, however, is the Bank also provides banking services; it is in actual fact a bank. The Bank's principles customers are other central banks, overseas international organisations such as the Organisation for Economic Cooperation and Development. But our most important banking customer is in fact the Australian government and the various agencies and departments of the government. At a very high level there are two parts to our banking services, our core banking service and our transactional banking service.

Core banking service is a service that's very similar to what we would find if we looked at many other central banks around the world. It is essentially a service whereby the Reserve Bank maintains the government's core set of accounts, this is around half a dozen accounts that the government holds, through which almost all of its payments and receipts flow. Money is moved into, and out of, the core bank accounts on a daily basis and on average each day around three billion flows out and roughly the same amount moves back in again.

It's very important for the government to ensure that the payments that it makes go out on time and that the money that it's expecting to receive comes in on time as well. It's important for those systems to ensure that the movement of funds is just on time, the systems themselves are sophisticated enough to ensure that the government doesn't have idle balances sitting around and that its payments are made just when the government intends to make them.

Transactional banking services is more the kinds of service that you would see in a commercial bank whereby various customers hold accounts and the Bank will facilitate movements in and out of those accounts. So the Reserve Bank provides accounts for various government departments and agencies and will facilitate the process of moving funds in and out of those accounts. The transactional banking service is unique compared to the core banking service in that we are required to compete with the commercial banks to provide that service.

On an annual basis there are around 350 million transactions through our transactional banking service with a total value, over the course of the year, of just under a trillion dollars. The kinds of payments and transactions that occur through the transactional banking services are the ones that many people in the public would probably be aware of. They include pension payments, social security benefits, child support transactions. They go through the Reserve Bank's banking service, and also emergency payments, so in times of natural disasters for example, when the government is keen to ensure that victims of natural disasters have access to funds in order for them to purchase food and other items, emergency payments will flow through the Reserve Bank's transactional banking system.

Payments Settlements

The Reserve Bank manages the settlement of interbank payments in Australia through the operation of RITS (the Reserve Bank Information & Transfer System) and the conduct of Exchange Settlement Accounts. RITS settles around $170 billion high value payments each day. The Bank also settles its own transactions, and those of around 50 overseas central banks and official institutions.

Transcript

Greg Johnston, Head of Payments Settlements

Payments are often referred to as the plumbing of the economy.  When people buy and sell goods and services, a payment usually flows.  For more than half of those payments, the buyer and the seller bank with different financial institutions. So when that occurs money needs to flow from one financial institution to another to make the payment successful.  In Australia, that occurs across exchange settlement accounts at the Reserve Bank.

Payments Settlements Department’s role is running the system that enables that settlement to occur. For high value payments, settlement occurs in real time as they’re exchanged between financial institutions. We do this to eliminate the risk, immediately as those payments are flowing, that relates to the obligation from one financial institution to another.

For low value payments such as those made by cards, direct entry and EFTPOS payments, settlement occurs after the exchange, usually at 9 am the next morning. But for direct entry payments we settle those later on the same day those payments are exchanged.

The system that settles payments in Australia is called the Reserve Bank Information and Transfer System, or RITS.  RITS settles around $170 billion high value payments each day, and probably a further $7 billion in low value payments every day.  Payments Settlements Department is also responsible for settling transactions that the Reserve Bank initiates, such as it implements open market operations.  It also is responsible for settling transactions initiated by overseas central banks that bank with the Reserve Bank here in Australia.

RITS is a critical component of the Australian financial system, it’s owned and operated by the Reserve Bank, and we invest very heavily in ensuring that it is stable and reliable and always there to meet the needs of the Australian economy.  Supporting innovation is a very key theme for Payment Settlements Department at the moment.  The industry is involved in developing a new payments platform. This new platform will enable a new payment to be offered to the Australia community. It will enable a sender to send, in real time, a payment to a beneficiary and have that beneficiary be able to see that payment within seconds of the payment being sent.  In addition to that, there will be a good deal of remittance information that will be able to be sent with that payment. If you buy a car on the weekend and it happens to be an expensive car, instead of having to write out a cheque, you might be able to then pull out your mobile phone, send the payment to the car dealer and the car dealer can see straight away that the payment has been made and is therefore happy to give you the keys.

Business Liaison Program

The Reserve Bank of Australia maintains offices in Perth, Brisbane, Melbourne and Adelaide. Economists in these offices conduct liaison with individual firms and agencies, in the private and public sector, in order to analyse economic conditions throughout Australia. Their regional economic intelligence forms part of the assessment of the Australian economy that influences the Bank's the monthly monetary policy decision and it contributes to the Bank's forecasts for economic growth and inflation.

Transcript

Virginia Christie, Senior Representative at Reserve Bank of Australia

The Liaison Program is the way in which the Reserve Bank's been able to extend its presence in the Australian community. And so there was a recognition that it was important for the Bank to engage with the business community and to feed messages from the business community into that one very important decision on interest rates. So in 2001 we established state offices in Perth, in Adelaide, in Melbourne, and in Queensland and our Head Office is here in Sydney, and the idea was that by being on the ground we would be able to introduce more concepts and more information about what's happening in the economy and that just helps make better informed decisions on economic policy.

There are a couple of big advantages by having the Liaison Program; firstly the information that we get from the business contacts is highly relevant because decisions that they make today will lead to economic outcomes tomorrow, so you can't get much better than that and secondly it's very timely so it often gives us insights into how the official statistics are going to be playing out. And a good example of this is our retail liaison, so we meet with key firms across the whole of Australia or we speak to them every month and by doing that we're getting an on the ground assessment of not only how they're going but what their future plans are. And this information comes out about two to three weeks before the official statistics are released, so when it comes down to policy you know that's a huge advantage.

The Liaison Program is intended to be as far reaching as possible, so when we select our liaison participants for the program we are trying to ensure that we have a good cross section of contacts who are representative of conditions in their sector or industries, so we don’t necessarily only want to speak to the big firms in the mining sector, but it's important for us to understand what's happening in the tourism sector, education, manufacturing, so we ensure that we have that broad spread. And because we're speaking to large firms it's still important for us to understand what's happening with small businesses. There are too many small businesses for us to meet, so what we do we organise round table discussions with a group of small businesses on a fairly regular basis across the states and also in Head Office Sydney.

Well we're trying to seek firm specific information, and we're wanting not only to understand whether firms are going to be increasing or decreasing investment or wages or the like, we also want an understanding of the reasons why they're doing this because this adds to the richness of the information. And I think a good example of this was during the Global Financial Crisis in 2008, so there was a lot of pessimism around about future prospects for Australia, and rightly so at the time, but when we spoke to our contacts we started to get an understanding that in actual fact the first thing they were going to do wasn't to reduce the number of jobs in their workforces, they wanted to retain flexibility in the workplace and so they reduced hours worked, and they encouraged people to take accumulated leave and the reason they did this was because when growth resumed at whatever point that might have been they didn't want to be in a position where then they had to look for new employees and go through the same problems that they actually did during the boom period. So we wouldn't have had those great insights if it wasn't for the Liaison Program.

The information from the Liaison Program gets used in a variety of ways, it gets incorporated into information that's used in Head Office for the forecasts, but because it's so timely and because it's giving us these very insightful views on how things might be playing out into the future, we have learnt about so many different things in the economy and a good example of this is with the mining investment boom. So we had the privilege of being able to speak to mining firms and mining firms gave us information about their investment plans into the future and when we joined the dots together, we realised that this mining investment boom was going to be much larger in magnitude than what we'd envisaged, and also for that reason for what anyone else was thinking at the time. So this gave the Reserve Bank some time to step back and think about the implications of this mining investment boom on the rest of the economy and what policy responses should or shouldn't be taken as a result of that. So we wouldn't have been able to get those insights if it wasn't for the mining Liaison Program.

Another great example was with the natural disasters, the Queensland floods and cyclones in 2010 and 2011, and so when it came to bear then we phoned our contacts, we got on the phone and we spoke to them and said well look, how's this playing out. And it wasn't just a matter of understanding what damage was done, but it was also a matter of understanding what responses were going to be put into place, and how long it was going to take. And what we learnt from this process was that coal production was going to be affected in quite a large way and the reason for that was that the coal mines were flooded, so the mines, they had to extract the water from the mines before they could resume production again, and that took a lot longer than it was initially thought. So that affected output growth in the economy and then by activating our agricultural contacts we realised there was lost production and that was going to also affect output growth, but the big impact on lost agricultural production was actually through prices and its impact on the Consumer Price Index which is very important for the Bank, you know, because it's an indicator of inflation and we're an inflation targeting central bank.