Role of the Reserve Bank
The Reserve Bank is Australia's central bank. It is a national institution that serves the Australian people by conducting monetary policy, maintaining stability in the financial system and promoting efficiency and competition in the payments system. The Reserve Bank also issues Australia's banknotes and provides banking services to the Australian Government.
What does the Reserve Bank do?
Find out what the Reserve Bank of Australia does in this short animated video.
The Reserve Bank is Australia's central bank.
We aren't like a commercial bank, in that we don’t provide bank accounts or loans to the public.
We set the official interest rate for Australia, which is called the cash rate. This rate influences the interest rates on savings and loans; it ensures that prices for goods and services don’t rise too quickly.
At the Reserve Bank, we know how important this decision is so we look at the economy in detail.
We also keep a close eye on Australia's financial system, ensuring that it's healthy and stable so that your money is safe.
We ensure that the payment systems you use are secure and working efficiently.
We make and distribute Australia's banknotes. Our banknotes’ cutting-edge security features make them some of the most secure in the world, with more than $74 billion worth of banknotes in circulation.
We are the banker for the government. For example, when you visit the doctor and receive a Medicare rebate, we process the payment for the government. Every year we process over 300 million payments on behalf of government agencies.
We do all of these things to help protect and support the economic welfare of all Australians.
Learn more at www.rba.gov.au/education.
Role and Functions
Watch former Governor Glenn Stevens explain the role of the Reserve Bank of Australia and talk about its different functions and activities.
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.
In a Nutshell
Roles and Functions of the Reserve Bank of Australia
Describes the different roles and functions of the Reserve Bank of Australia.
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.
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.
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.
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 of 0.25 percentage points 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 0.25 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.
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.
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.
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.
Roles and Functions
The presentation summarises the roles and functions of Australia's central bank.
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 October 2018, graphs with forecasts are updated to 9 August 2018, and other data are updated to 27 September 2018.
Opening the Vault
Guides students through how to find the information they need on the RBA website.
Helps students familiarise themselves with RBA publications and provides some tips to make the most of the information provided.
Read and Rehash
Guides students through how to make the most of RBA publications.
Key Economic Indicators – Unpacking the Snapshot
Helps students to apply skills to summarise and explain key economic statistics and trends.
The Transmission Mechanism
Helps students understand how a change in the cash rate flows through to the rest of the economy.
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.
Perspectives on RBA decisions
Helps students to consider how decisions made by the RBA might affect different people in the economy.
Building Charts Using RBA Statistical Tables
Helps students to gain confidence building Excel charts from data available on the RBA website.