RDP 9703: The Implementation of Monetary Policy in Australia 1. Introduction

Over the past decade, the monetary-policy framework in Australia has changed substantially, with the most significant change being the adoption of an inflation target in the early 1990s.^[1] There have also been changes at the operational level. Many of these changes were part of an evolutionary process following the deregulation of financial markets in the first half of the 1980s, but a major change occurred in January 1990 when the Reserve Bank began to announce changes to the stance of monetary policy, as reflected in the level of overnight interest rates. Prior to that, it simply operated in the market and left market participants to draw their own conclusions about policy changes. One consequence of this move to announcements was that interest-rate changes are now implemented as discrete, and fairly large, steps.

This paper discusses some of the thinking behind these changes in operating procedures and the effects that they have had on financial markets and the transmission mechanism. It begins by describing the main features of current operating procedures (Section 2). Section 3 discusses the reasons why the Bank adopted these arrangements. Section 4 then examines the impact of the changed procedures on financial markets, including the effects on interest-rate volatility, market turnover, and the speed with which financial institutions adjust their deposit and lending rates. Finally, Section 5 makes some concluding comments.

Footnote

The Bank's inflation objective is to achieve an average rate of inflation of between 2 and 3 per cent over the course of the business cycle. This objective has been formally endorsed by the Federal Government. [1]