Videos Functions and Activities

Transcript

Michele Bullock, Governor

Our job here at the Reserve Bank is to serve the community. The Parliament of Australia has given the Reserve Bank some very important responsibilities. It is our duty to promote the economic prosperity and welfare of the people of Australia, both now and into the future. We do this in many ways, including by setting monetary policy to maintain price stability and full employment, by contributing to the efficiency and stability of the payments system and the stability of the financial system, and by banking the Australian Government and providing the nation’s banknotes.

Probably the thing we do that is most familiar to people is set the level of interest rates. This is known as ‘monetary policy’, where we change interest rates to try to smooth fluctuations in the economy. The interest rate we control is the cash rate, which is the rate that banks charge each other to borrow overnight. Now this interest rate influences other interest rates in the economy, such as those charged on your loans, or those you earn on your savings. Changes in interest rates influence people’s decisions to buy things or invest money, and they affect the exchange rate and the value of any assets that people might hold, such as homes or shares. All this affects economic activity. In deciding where to set the cash rate, we want to keep inflation low and stable, averaging 2-3 per cent – our inflation ‘target’, if you like. But we want to do it in a way that keeps the level of employment as high as possible. These outcomes are essential for a prosperous economy.

But there are many other things that we are responsible for as well.

The Reserve Bank’s also responsible for the stability of the financial system. We typically think of a stable financial system as one that is safe and helps money flow within the economy, even when there are disruptive events. We contribute to financial stability in a number of ways. One important way is by setting monetary policy that helps keep inflation low and stable and people fully employed. We also collaborate with other financial regulators – Australian Prudential Regulation Authority, Australian Securities and Investment Commission and the Australian Treasury – through the Council of Financial Regulators to identify risks in the financial system and to develop plans to address them if they arise. In extreme situations, we can also provide lending to financial institutions that are sound but experiencing difficulties with liquidity.

Now we also make and distribute Australia’s banknotes. We have some of the highest quality and most secure banknotes in the world and they use technology that we in Australia invented, the Bank invented it with the CSIRO in the 1980s – polymer, or if you like, plastic banknotes. We have a purpose-built banknote printing facility and vault in the outer suburbs of Melbourne. It might surprise many people that despite the use of electronic payments increasing, there is still a lot of demand for banknotes, particularly as a store of value.

We also operate the payment system that is at the centre of the movement of money in Australia. When money goes from one bank to another, say when you pay a bill to somebody who banks with a different bank, the money comes through the Reserve Bank. We are also constantly looking at innovations to provide Australians with the most efficient and secure ways to pay. For example, we worked with the banks to develop the New Payments Platform, which allows people to make payments in close to real time, 24 hours a day, 7 days a week. And we are looking at how the nature of money and the payments system could evolve as technology changes.

We are the banker for the Australian Government. So, when you get a Medicare refund, pay your tax or receive a refund, those transactions occur through the government’s bank accounts here at the Reserve Bank. It’s the same if you’ve ever needed a disaster relief or other support payment, perhaps during the COVID-19 pandemic, floods or bushfires. We know that many people rely on these payments, and we feel privileged to partner with the government in getting these vital payments to you quickly and reliably.

A lot of research, analysis, innovation and support is required to deliver all of these functions. We do all this with a bit over 1,500 people. Most of us are located here in Sydney. But we have a banking branch in Canberra and offices in Brisbane, Melbourne, Adelaide, Perth, Beijing, London and New York.

We’re the nation’s central bank and we take our responsibilities to the Australian people very seriously.

Transcript

Inflation that is too high is a problem for the economy and individuals. Inflation is an increase in the prices of the goods and services you buy. Inflation can put pressure on your budget as your money won’t go as far as it used to.

Take, for example, your weekly visit to the supermarket. When prices are rising faster than your wages, over time you won’t be able to afford to buy as many items as before.

High inflation can come from a few sources including when businesses can’t supply enough products to meet customer demand, or when their costs go up.

That can be made worse if people come to expect high inflation, as it can be self-fulfilling and lead businesses to put through even bigger price increases.

High inflation makes it hard for households and businesses to plan ahead because they don’t know what prices they will be buying and selling at.

Managing inflation comes down to getting a good balance between supply and demand for goods and services. People often ask us how our interest rate changes affect inflation. Here’s the main way.

When inflation is too high, we increase our policy interest rate which increases borrowing costs for commercial banks. The banks usually pass on these higher costs by increasing their interest rates on loans.

People and businesses with loans will see their repayments rise. As people and businesses have bigger repayments on their loans, they have less money to spend on other things. This reduces demand for goods and services, economic activity slows down and this leads to lower inflation.

Our goal is to keep annual inflation between 2–3 per cent on average and we need to keep adjusting the policy interest rate until we are confident inflation is under control.

Maintaining inflation within this range preserves the spending power of money and encourages strong and sustainable growth in the economy, which benefits us all.

Transcript

The RBA’s purchases of government bonds help to keep interest rates low for households, businesses and governments and get more people into jobs.

Lower interest rates mean lower repayments on mortgages and other loans. This makes it cheaper to borrow and frees up cash for households and businesses to spend and invest. More spending and investment in the economy means businesses can hire more people.

A government bond is a loan created by a government and sold to an investor for a set period of time in return for regular interest payments.

We buy government bonds from financial institutions, such as banks. When we purchase them, we pay the financial institutions by crediting their deposit accounts at the RBA.

Importantly, this means we are not buying bonds directly from the government. Instead, if the government wants to borrow money, it sells new bonds to investors, as it usually does.

Job creation is an important national priority over the next few years and we will keep interest rates low until more people are in jobs, wages are growing faster and inflation is between 2 and 3%.