Reserve Bank of Australia Annual Report – 1997 Governor's Foreword

This Annual Report marks a departure from tradition in that it is primarily a report on the operations of the Reserve Bank, rather than an economic commentary. The reason for this change is that we now have so many opportunities during the year to report on the economy and monetary policy that we do not need to use the Annual Report for this purpose. The four quarterly reports on the economy (one of which was issued only a fortnight ago), the two appearances before a Parliamentary Committee, the published explanations at the time of monetary policy changes, and the various speeches and articles in the Bank's monthly Bulletin fulfil the Bank's communications role more than adequately.

But there are other operations that we undertake besides monetary policy where there are fewer opportunities to communicate; this Report allows us to give a fuller account of these as well. The main ones are our operations in the money, bond and foreign exchange markets, our supervision of the banking system, our participation in the payments system, our provision of banking and other commercial services, and the printing and issuing of currency notes.

More details of these activities are contained in this Annual Report than in previous Reports. We have also provided, where possible, some objective indicators of performance or cost of the various activities, with the aim of improving public accountability. This information is not always available, but we remain committed to the view that increasing transparency and accountability are crucial for the public support of any national institution such as the central bank.

Notwithstanding these considerations, any recording of the year's events must start with our most public activity – monetary policy – and then proceed to the others. The following list is intended to cover the main operations of the Bank over the past year.

• Monetary policy was eased five times, bringing the cash rate down from 7.5 per cent in July 1996 to 5.0 per cent in August 1997. This was in response to forecast developments in the economy, which showed inflationary pressures easing and slower economic growth. Over the course of the year, GDP appears to have risen by a little less than 3 per cent and underlying inflation was 1.7 per cent. In many circumstances, this would be seen as a good result for an economy in the sixth year of an expansion, but developments in the labour market were disappointing. Employment grew by less than 1 per cent, which left the unemployment rate in the mid to high 8 per cent range through the year.
• In August 1996, at the time of my appointment, the Treasurer and I jointly signed the Statement on the Conduct of Monetary Policy. This was an important further step in clarifying the relationship between the Bank and the Government within the framework of the Reserve Bank Act.
• Operations in domestic financial markets over the past year were directed principally to implementing the five reductions in interest rates at the time of monetary policy easings, and maintaining stability in the cash rate between policy changes. Some significant changes were made to our dealing arrangements in the money market to handle the ending of the ‘authorised money market dealer’ arrangements and to prepare for real-time gross settlement (RTGS). In the foreign exchange market, the main action was a reasonably substantial purchase of foreign currency in the first half of 1996/97 to rebuild international reserves.
• On the bank supervision side, the main new activity has been preparation for implementing capital adequacy requirements for market risk. Some changes in banking and finance policy have been put on hold pending the release of the Financial System Inquiry's report and the Government's response. The Bank made two published submissions to the Inquiry.
• In the payments system area, on the other hand, there was a large team effort involved in building the RTGS system (due for completion by April 1998). This is an essential piece of financial infrastructure if Australia is to compete seriously in world financial markets. Four of the five functional areas of the Bank are involved in this project, with about 50 people working on it at any one time. Close co-operation with banks and other financial services providers is also essential to get this project completed on time.
• Banking, registry and settlement services to customers, principally the Commonwealth Government, continued to be provided in the most cost-efficient manner possible. Further efforts were made to keep down costs and ensure that these services were provided on a commercial basis. This has been an ongoing preoccupation of the Bank, but was given further impetus by the Government's Competitive Neutrality Taskforce which has been examining public sector commercial activities to ensure they compete on even terms with private sector providers.
• Two-thirds of the Bank's gold holdings were sold in the second half of 1996/97 and the proceeds invested in foreign government securities. This change in the composition of international reserves was only the fourth major change in the post-war period. The first was the move out of sterling into US dollars in the late sixties, the second was diversification into other currencies, and the third was the benchmark in 1991, which involved a relatively even distribution of reserves between US dollars, Japanese yen and German marks.
• No new designs for domestic currency notes were introduced over the past year as the transition of the Australian note issue from paper to polymer has been completed. Production for export continued to rise and in 1996/97 was equivalent to two-thirds of domestic production; notes were produced for Thailand, Brunei, Papua New Guinea and Western Samoa.

Turning to the management of the Bank, the most striking aspect has been the almost continuous fall in staff numbers for over a decade. From a peak of 3841 in 1983, staff numbers (including Note Printing Australia) have now fallen to 1571 in June 1997, including a decline of around 210 in 1996/97. A fall of this magnitude gives the impression of some draconian pruning initiated by Governors, but that certainly was not the intention. The decline in numbers over recent years resulted from a rolling series of re-examinations of procedures and staffing levels, largely initiated within departments or by Assistant Governors. The replacement of manual paper-based processes by automatic data processing was, of course, a major part of the story, but there were other efficiencies as well. One benefit of these economies is that operating costs of the Bank are now lower in nominal terms than at the beginning of the decade.

Of course, changes of this magnitude have been unsettling for staff. The biggest changes have been in the business services area, where staff have recognised that to keep their business they have to provide service of the highest quality as cost-effectively as possible. In other areas too, staff have shown a remarkable capacity to cope with reorganisation, which nearly always results in downsizing. I am grateful for the professional way in which these changes have been achieved and for the loyalty and tolerance of the staff over recent years.

This Report, and financial statements, have been prepared in accordance with the provisions of Section 81 of the Reserve Bank Act 1959. I have pleasure in submitting it to the Treasurer and arranging for its tabling in the Senate and House of Representatives.

IJ Macfarlane
Chairman
Reserve Bank Board