Monetary Policy
An important role of the Reserve Bank is conducting monetary policy to achieve the objectives of the Reserve Bank Board. It is the responsibility of the Board to set interest rates in a way that best contribute to the stability of the currency (which means price stability), full employment, and the economic prosperity and welfare of the people of Australia.
To achieve price stability, the Reserve Bank uses a flexible medium-term inflation target, with the goal of keeping inflation between 2 and 3 per cent, on average, over time. The Reserve Bank sets the cash rate to influence economic activity and inflation to achieve this goal.
Videos
Monetary Policy Framework
Watch Governor Philip Lowe discuss the objectives of monetary policy and the inflation target, along with the structure of the Reserve Bank Board.
Transcript
Philip Lowe, Governor (2016 – Present)
The Reserve Bank's Charter was written in 1959. It's broader than the charter of most other central banks, it's got three key elements. The Reserve Bank is responsible for low and stable inflation, for full employment, and promoting the general welfare of the Australian people. I'm glad we've got this broad mandate, it's, as I said, it's broader than most other central banks, many other central banks just have a mandate to control inflation. In the end, low inflation is not the goal in and of itself, it's delivering low inflation to promote the economic prosperity of the Australian people.
The Reserve Bank Board sets the cash rate on the first Tuesday of every month. The cash rate is the rate that banks use to lend to one another in a short-term money market, but it has a very large effect on mortgage rates in the economy, on the rates that people get on their savings, and affects asset prices and the exchange rate, so it's a very important interest rate.
Sometimes, we need to raise interest rates to achieve those objectives. If the economy's growing very strongly, demand's very buoyant and that's pushing up prices, we might need to raise interest rates to slow the economy, to get things back onto an even keel. Conversely if things are weak and demand is not very strong and inflation's low, we might need to lower interest rates to stimulate demand and get inflation back up towards the target.
When we change interest rates, people obviously notice in their mortgages, and that affects how much they spend. When rates are going up, they have less to spend, and when rates are going down they have more to spend. Changes in the cash rate also affect the exchange rate. If we raise interest rates, the currency tends to appreciate, and when we lower interest rates the currency tends to depreciate. Changes in interest rates can also affect people's confidence. In some circumstances, lower interest rates makes people feel happier, in other cases it, higher interest rates make people feel less happy, and so that affects their spending. Changes in interest rates also affect asset prices. When we have lower interest rates, that tends to push up asset prices, and if asset prices are higher, people might feel wealthier, and if they're wealthier, they might spend more, and conversely, if higher rates might mean lower asset prices, then people don't feel as confident and they don't spend as much.
Our Board is made up of mainly outside people, who are either business people or people who have experience in other areas of public policy or public service. And I think that's really valuable. What I notice about business people and people who have the broader experience is they're very good at making decisions under uncertainty, and much of what the Reserve Bank Board is doing is making a very important decision in a quite uncertain world, so we're trading off things all the time and we're trying to make the best decision in the welfare of, best welfare of the people of Australia. And the business people and people with outside expertise are very good at doing that. Daresay they're actually better doing it than economists, so I like, kind of having this broad perspective on our Board, I think it also helps the legitimacy and the public accountability of the Board, it's much better to have the interest rate decisions made by this broad group of people rather than primarily made by technical, academic economists. So I'm a strong fan of our current board structure, although it's quite different from the boards of most other central banks.
At a very practical level, we operate a flexible medium-term inflation target. Our objective is to deliver an average rate of inflation for the community between two and three percent, over time. We're prepared to allow the inflation rate to move up and down over time, but we want people to be confident that over time, inflation in Australia will be two point something. And if people are confident of that they can go about making their decisions about saving, investment and spending, with assurance that inflation will be low and stable, the value of their money will be protected because it won't be eroded by inflation, then they can have certainty about what the price level will do over time.
Domestic Market Operations
Watch Deputy Governor Guy Debelle talk about the Reserve Bank's domestic market operations and how this keeps the cash rate as close as possible to its target.
Transcript
Guy Debelle, Assistant Governor (2007 – Present)
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.
Introduction to Monetary Policy
A Video Explainer introducing key concepts related to monetary policy
Objectives of Monetary Policy
A Video Explainer discussing the objectives of monetary policy
Interest Rates: Introduction
A Video Explainer discussing key concepts related to interest rates
Conventional Monetary Policy Tools: the Cash Rate Target
A Video Explainer discussing the RBA’s cash rate target
Interest Rates: Short- and Longer-term
A Video Explainer exploring concepts related to short- and longer-term interest rates
Unconventional Monetary Policy Tools: Part 1
A Video Explainer discussing unconventional monetary policy tools (forward guidance and asset purchases)
Unconventional Monetary Policy Tools: Part 2
A Video Explainer discussing unconventional monetary policy tools (Term Funding Facility and adjusted market operations).
Monetary Policy in 2020
The effect of COVID-19 on the Australian economy and the RBA's response to it as at August 2020 – a Topical Talk featuring Andrea Brischetto
Bonds and the Yield Curve
A Video Explainer introducing key concepts related to bonds, the bond market and the yield curve
In a Nutshell
Roles and Functions of the Reserve Bank of Australia
Describes the different roles and functions of the Reserve Bank of Australia.
Monetary Policy
The Reserve Bank conducts monetary policy to achieve its goals of price stability, full employment and the economic prosperity and welfare of the Australian people.
Operations in Financial Markets
The Reserve Bank operates in domestic and international financial markets. This is to implement monetary policy, help ensure the smooth functioning of payments and manage Australia's foreign exchange reserves.
Financial Stability
The Reserve Bank is responsible for overall financial system stability. It does this by managing and providing liquidity to financial institutions, monitoring risks and cooperating with other organisations as part of the Council of Financial Regulators.
Payments and Financial Markets Infrastructure
The Reserve Bank has responsibility for ensuring the stability, efficiency and competitiveness of the payments system. It also has a regulatory and operational role in ensuring that the payments infrastructure promotes financial stability.
Banknotes
The Reserve Bank is responsible for producing and issuing Australia's banknotes. Its goal is to produce banknotes that everyone can trust, both as a means of payment and a store of value.
Banking Services
The Reserve Bank provides a range of banking services to the Australian Government and overseas central banks. Payments and transactions often relate to the everyday lives of Australians, such as social security benefits and emergency payments to people affected by natural disasters.
Monetary Policy in Australia
Describes why and how the Reserve Bank conducts monetary policy.
The Reserve Bank conducts monetary policy to achieve its goals of price stability, full employment, and the economic prosperity and welfare of the Australian people.
It does this by using an inflation target to help keep inflation between 2-3%, on average, over time. The tool to manage inflation is the cash rate.
The Reserve Bank Board meets eleven times a year, on the first Tuesday of the month, to decide what the cash rate should be.
The cash rate has a strong influence over other interest rates, such as lending and deposit rates.
A reduction in the cash rate typically stimulates spending and inflation, while an increase in the cash rate typically dampens spending and inflation.
If inflation is likely to be too high for too long, the Reserve Bank Board would typically increase the cash rate to bring inflation back to the target. If inflation is likely to remain too low, the cash rate would typically be lowered.
Monetary Policy Implementation in Australia
Describes how the Reserve Bank implements monetary policy and keeps the cash rate as close as possible to its target.
The Reserve Bank implements monetary policy by keeping the cash rate as close as possible to the target.
It does this by conducting money market transactions. These ‘open market operations’ are typically conducted as auctions.
Open market operations increase or decrease the amount of cash held by banks.
The Reserve Bank also helps banks manage cash under terms where lending and deposit rates form a corridor above and below the cash rate target. The corridor helps keep the cash rate close to target.
The Reserve Bank lends cash to banks at an interest rate 0.25 percentage points above the cash rate target. Banks would not borrow cash at a higher rate, so there is no market above this lending rate.
Banks deposit cash with the Reserve Bank at 0.1 percentage points below the cash rate target. Banks do not lend cash at a lower rate, so there is no market below this deposit rate.
This resource does not reflect unconventional measures currently in place. For a description of unconventional monetary policy, please see Explainer: Unconventional Monetary Policy.
The Inflation Target
Defines Australia's inflation target and explains why and how it is used.
The Reserve Bank has an inflation target to achieve the goals of price stability, full employment, and prosperity and welfare of the Australian people.
Australia's inflation target is to keep consumer price inflation between 2–3%, on average, over time. The inflation target is flexible and allows for temporary fluctuations in inflation above or below the target.
Low and stable inflation reduces uncertainty in the economy, helps people make saving and investment decisions, and is the basis for strong and sustainable economic growth.
The Reserve Bank adopted the inflation target in the early 1990s. The Bank and the government agree on the importance of the inflation target and formally set out this agreement in the Statement on the Conduct of Monetary Policy.
The Reserve Bank uses the cash rate to stimulate or dampen economic activity such that inflation is in the target range over the medium term.
If inflation is likely to be too high for too long, the Reserve Bank Board would typically increase the cash rate to bring inflation back to the target. If inflation is likely to remain too low, the Board would typically lower the cash rate.
Financial System Regulation in Australia
Describes who is responsible for financial system regulation in Australia.
The Council of Financial Regulators (CFR) is the coordinating body for Australia's main financial regulatory agencies. It includes the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury.
The role of the CFR is to contribute to the efficiency and effectiveness of regulation and to promote the stability of the Australian financial system. The Governor of the RBA chairs the CFR and each of the agencies plays a different role in promoting financial stability.
The RBA is responsible for promoting overall financial system stability. It does this by managing and providing liquidity to institutions, regulating the payments system (including financial market infrastructures) and monitoring risks in the financial system.
Financial Stability
Describes why and how the Reserve Bank helps maintain a healthy and stable financial system.
The Reserve Bank helps maintain a healthy and stable financial system. This is fundamental to the economic prosperity and welfare of the Australian people.
In a healthy financial system, money is channelled between savers and borrowers so that different activities, like spending by households or investment by businesses, can be undertaken.
A healthy financial system is resilient so that money keeps flowing even when the economy slows or there are disruptive events.
The Reserve Bank ensures that there are adequate funds in Australia's financial system. During the global financial crisis, the Reserve Bank provided temporary extra funding to the system.
In normal times, the Reserve Bank watches for emerging risks in the financial system. Twice a year it publishes a financial ‘health check’ in the Financial Stability Review. Where risks pose a threat to the financial system, the Review explains the issue and the policy response.
The Reserve Bank chairs the Council of Financial Regulators, which includes the prudential regulator APRA, the corporate and financial services regulator ASIC, and the Australian Treasury. The Council meets at least four times a year to discuss current issues and policies. In a financial crisis, it coordinates responses across the member agencies.
Financial Aggregates
Defines money and credit and describes how they can be used to understand developments in the economy.
The Reserve Bank publishes and monitors data on the stock of money and credit in Australia. These data are called the financial aggregates. They can be used to help understand developments in the economy.
Money can be held in different forms – for example, as banknotes in your wallet and as deposits in the bank. The main measures of money are the money base, currency, M1, M3 and broad money.
Credit is a measure of funds borrowed from the banking system. People borrow to purchase things such as houses, cars and holidays. Businesses also borrow to invest in projects and buy assets. Total credit can be broken down into housing credit, personal credit (such as on credit cards) and business credit.
Monitoring changes in the stock of money and credit is important because it can help us understand more about what's happening in the economy. Monitoring changes in credit can also be helpful for identifying risks to financial stability.
Higher credit growth tends to be associated with more positive economic conditions (e.g. people wanting to borrow and spend more and banks being willing to lend more). Lower credit growth tends to be associated with less positive economic conditions. But rapid credit growth could signal growing risks to financial stability, particularly if debt levels are already high.
Changes to the cash rate can influence credit growth because of the effect that the cash rate has on other interest rates related to credit, such as on housing loans, credit cards and business loans.
How Australians Pay
Describes some of the most common payment methods used when paying for goods and services.
When you pay for something, you can usually choose how you pay. Here are some of the most common payment methods. Debit card 30%. Credit card 22%. Cash 37%. Other 11%.
When you pay – for example, in a shop – the shop owner faces costs for accepting your payment, including bank fees and the opportunity cost of their time. These costs depend on how you pay.
Cash is usually a low-cost method, particularly for small transaction sizes. A shop owner might not pay any fees related to the use of cash, but may face other costs (for example, time taken to deposit the cash received).
Debit cards (which use your own money from your bank account) are generally lower cost than credit cards.
Shop owners usually pay higher fees to accept credit cards (which borrow money from your bank). Fees vary depending on the type of card, and are typically higher for cards that provide rewards (such as frequent flyer points) to the cardholder.
If you use a more expensive payment method, the shop owner has to pay for it. Shop owners can either increase the prices of what they sell for all customers, or can pass on the cost directly to customers that use high-cost methods by adding a surcharge, which encourages people to switch to low-cost methods.
Banknotes in Australia
Describes the role of the Reserve Bank in producing Australia's banknotes and highlights some common features of the banknotes.
The Reserve Bank is responsible for designing, producing and distributing Australia's banknotes. Its goal is to produce banknotes that everyone can trust as a payment mechanism and a store of value.
Australia has five denominations of banknotes: the $5, $10, $20, $50 and $100. There are more than 1.5 billion banknotes on issue, worth more than $73 billion.
Australia has very low levels of counterfeiting. The Reserve Bank keeps our banknotes safe by researching anti-counterfeit technologies and upgrading security features.
Australia's banknotes are printed on polymer (plastic). They start out as plastic pellets that are melted down into large sheets, and then designs are printed onto them.
Each banknote is produced with a unique serial number. The two letters represent the banknote's position on the sheet and the first two numbers indicate what year the banknote was printed.
Polymer banknotes are recyclable. At the end of their life cycle, old and damaged banknotes can be recycled into products such as building materials and compost bins.
Explainers
What is Monetary Policy?
Explains what monetary policy is, what it aims to achieve and how monetary policy decisions are both made and implemented.
The Transmission of Monetary Policy
Describes how changes made by the Reserve Bank to the cash rate – the ‘instrument’ of monetary policy – flow through to economic activity and inflation.
How the Reserve Bank Implements
Monetary Policy
Describes the Australian cash market and explains how the Reserve Bank ensures that the cash rate is as close as possible to its target.
Unconventional Monetary Policy
Describes the different tools used by central banks (including the Reserve Bank of Australia) when conducting unconventional monetary policy.
Australia's Inflation Target
Describes the inflation target, why the Reserve Bank targets inflation and how the target works.
Inflation and its Measurement
Describes how inflation is measured, explains how different indicators of underlying inflation are calculated, and outlines some of the limitations of using the Consumer Price Index.
Economic Growth
Explains what economic growth is, how it is measured and explores the concepts of aggregate demand and supply.
Recession
Describes the nature of the business cycle, different approaches to identifying a recession and some of the recessions that have occurred in Australia.
Productivity
Explains what productivity is, how it is measured, its drivers and the benefits of productivity growth.
Unemployment: Its Measurement and Types
Explains how the unemployment rate is measured and describes the main types of unemployment.
Drivers of the Australian Dollar Exchange Rate
Explains the factors that drive changes in the Australian dollar exchange rate over time.
Exchange Rates and the Australian Economy
Explains how changes in the value of the Australian dollar affect economic activity and inflation in Australia, along with the nation's balance of payments.
Exchange Rates and their Measurement
Explains the concept of an exchange rate, how exchange rates can be measured and the different types of exchange rate regimes that exist.
The Balance of Payments
Examines the structure of Australia's balance of payments, describes the relationship between its accounts and explains the accounting framework.
Trends in Australia's Balance of Payments
Describes the longer-term trends within the two sides of Australia’s balance of payments: the current account and the combined capital and financial account.
Bonds and the Yield Curve
Explains what a bond is, how the yield curve is formed from a series of bond yields and why the yield curve is important.
Banks' Funding Costs and Lending Rates
Explains what banks' funding costs and lending rates are and what influences them.
Australia and the Global Economy – Terms of Trade...
Discusses the causes of the terms of trade boom of 2005 to 2012 and explains the way in which it affected the Australian economy.
The Global Financial Crisis
Summarises the main causes of the global financial crisis, how the crisis unfolded and how policymakers responded to it in Australia and abroad.
What is Money?
Explains the features of money and the unique functions that money performs in an economy.
Cryptocurrencies
Explains what cryptocurrencies are, describes the Bitcoin system and discusses some of the public policy implications of cryptocurrencies.
Origins of the Reserve Bank of Australia
Traces the origins of the Reserve Bank to creation of the Commonwealth Bank of Australia in 1911, and outlines the growth in central banking responsibilities.
Digital Interactives
Inflation Explorer

The Inflation Explorer is an interactive tool that lets the user explore how prices of individual goods and services, and overall inflation, have changed over time.
Snapshot Comparison

This interactive tool allows you to compare snapshots of the economy at different points in time.
Teacher Updates
Bridging the Textbook Gaps on How the RBA Implements Monetary Policy

Explains how the RBA implements monetary policy, with a focus on how practice differs from theory as described in a typical textbook.
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Presentations
Roles and Functions

This presentation summarises the roles and functions of Australia's central bank.
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Monetary Policy and Current Economic Conditions

This presentation summarises the monetary policy framework and current economic conditions in Australia.
The cash rate is updated to 2 December, graphs with forecasts are updated to 5 November and other data are updated to 17 December.
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A Case Study of Monetary Policy Implementation on 3 August 2016

This presentation explains how the Reserve Bank implements monetary policy using a case study of what happened on a day when the Reserve Bank changed the cash rate.
A Case Study of Liquidity Management on 3 August 2016

This presentation explains how the Reserve Bank manages liquidity using a case study of what happened on a day when the Reserve Bank changed the cash rate.
What is the Economy?

This presentation contains key information introducing students to the economy, circular flow model, and interdependence of the different sectors.
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The Business Cycle

This presentation contains key information introducing students to the business cycle, inflation, interest rates and the role of the Reserve Bank.
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Learning Activities
Reading and Interpreting Charts

Provides questions and activities linked to the Reading and Interpreting Charts video.
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The Future of Work

Provides comprehension questions linked to the Future of Work video.
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Opening the Vault

Guides students through how to find the information they need on the RBA website.
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Unpacking Publications

Helps students familiarise themselves with RBA publications and provides some tips to make the most of the information provided.
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Key Economic Indicators – Unpacking the Snapshot

Helps students to apply skills to summarise and explain key economic statistics and trends.
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The Transmission Mechanism

Helps students understand how a change in the cash rate flows through to the rest of the economy.
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Exploring Inflation

Work through this Activity to investigate interesting examples of inflation developments and trends.
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You Make the Decision – the Cash Rate

Helps students identify key economic indicators and how recent movements in these indicators could influence the cash rate decision.
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Perspectives on RBA decisions

Helps students to consider how decisions made by the RBA might affect different people in the economy.
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Building Charts Using RBA Statistical Tables

Helps students to gain confidence building Excel charts from data available on the RBA website.
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Sectors in the Economy

Helps students understand the five sectors of the circular flow model
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Complete the Circular Flow Model

Provides an outline of the circular flow model for students to label
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Injections and Leakages

Helps students identify different economic activity as injections or leakages
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Business Cycle Case Studies

Help students consider how different people might be affected by the business cycle
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Snapshots
Composition of the Australian Economy
A snapshot of data showing the composition of Australia's economy.
Illustrators
Types of Unemployment

Summary of the different types of unemployment within the labour market.
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Groups in the Labour Market

Diagram showing the different groups of people within the labour market.
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Monetary Policy and COVID-19

Infographic outlining the monetary policy measures implemented by the Reserve Bank in response to the economic effects of COVID-19.
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The Circular Flow Model

Diagram showing and describing the five-sector circular flow model of the economy
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The Business Cycle

Diagram showing the business cycle and features of economic expansion and contraction
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