The Reserve Bank of Australia (RBA)

The financial entity that is responsible for the monetary and fiscal policy of Australia is the Reserve Bank of Australia (RBA). The central bank has a monetary policy committee, which includes:

• The Governor (also known as Chairman)
• The Deputy Governor (also known as Vice Chairman)
• Secretary to the Treasurer
• Six independent members (the government is responsible for their appointment)

Within the committee, consensus is applied regarding monetary decision making.

The major focus of the central bank is the preservation of the value of the currency and the control on inflation, which are believed to provide for the long-term sustainable growth of the Australian economy. The necessary discipline for monetary policy is provided by an inflation target. The latter also allows for the establishment of clear expectations regarding inflation in the private sector, which greatly increases transparency and thus economic activities.

The RBA mainly uses interest rates as a means to achieve its economic goals. Most of the monetary policy decisions include the establishment of the interest rate levels on overnight loans in the money market, since the interest rates in the overall economy are impacted by these rates. In this way the RBA manages to direct the activities of borrowers and lenders.

Another tool that the RBA uses for its monetary policy is open market operations. For its open market operations, the RBA applies a cash rate. The latter represents the rate which financial intermediaries have to pay for overnight loans. This leads to dependence between the interest rates that are observed on the money market and the cash rate that the RBA sets. As a result, if the RBA embarks on a change in the monetary policy, the structure of the overall financial system will be affected.

The RBA uses repurchase agreements as a tool to achieve the desired cash rate level. They involve a cash taker (usually a commercial bank), who sells securities to a cash provider (usually the RBA). The agreement includes the purchasing back of the same type securities in the same quantity but at a later pre-agreed time. The RBA increases the cash rate by decreasing the supply of short dated repurchase agreements and respectively, decreases the cash rate by increasing the supply of short dated repurchase agreements.

Monthly meetings of the RBA are held during which the potential changes in the monetary policy to meet new economic conditions are discussed. In order to outline and justify its monetary change decisions the RBA issues a press release. A monthly Reserve Bank Bulletin is also issued, which includes the Semi-Annual statement on the Conduct of the Monetary Policy every May and November. The Quarterly Report on the Economy and Financial Markets is issued every February, May, August and November. All of these documents are important to follow since they provide information on already made and expected changes in the monetary policy of Australia, which may have an effect on the forex activities of market participants.

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