Australia's Approach to Monetary Policy

By Little, Jane Sneddon | New England Economic Review, Spring 2002 | Go to article overview

Australia's Approach to Monetary Policy


Little, Jane Sneddon, New England Economic Review


According to Australia's Reserve Bank Act, the central bank's broad policy objectives include maintaining the stability of the currency, full employment, and the economic prosperity and welfare of the people of Australia. In 1993 the Reserve Bank of Australia adopted a specific, and thus transparent, inflation target as its operating objective; it aims to keep overall inflation (1) between 2 percent and 3 percent on average over the business cycle.

The Reserve Bank of Australia (RBA) is accountable directly to the Parliament and, through Parliament, to the general public. The Reserve Bank Act (1959) requires the Bank's Board to provide an annual report on its operations and finances to the Treasurer and to Parliament. A 1996 "Statement on the Conduct of Monetary Policy," issued jointly by the Governor of the Bank and the Treasurer, clarifies the respective roles of the Bank and the government in regard to monetary policy and provides formal government endorsement of the Bank's inflation objective. It also outlines a procedure for the Governor to appear before the House of Representatives Standing Committee on Economics, Financial Institutions, and Public Administration twice a year to report on its conduct of monetary policy. In the event of a disagreement between the Government and the Bank's Board on policy issues, the Reserve Bank Act lays out the procedures to be followed. They have never been used, and formal and informal contacts between the Bank , the Treasury, and other government departments are frequent.

Central Bank Assets

At the end of June 2001, the Reserve Bank of Australia held assets equaling $A58 billion, of which 62 percent were in foreign exchange and 2 percent in gold. Government securities (of which the majority were securities sold under repurchase agreements) comprised 8 percent, while loans, advances and bills held (including securities bought under repurchase agreements), and clearing items made up 26 percent.

Since the Bank began announcing its policy changes in 1990, the desired stance of monetary policy has been expressed in terms of the operating target for the cash rate, the money market rate on overnight interbank funds. Because the Australian system operates without reserve requirements, the banks' demand for overnight funds stems from their need for settlement balances, which are held as exchange settlement (ES) accounts at the Reserve Bank. Each bank is required to have a positive balance in its ES account at all times. Through its daily open market operations, the Reserve Bank adjusts the supply of funds to keep the cash rate close to its target.

Open Market Operations

Although, with minor exceptions, only banks have ES accounts, the Reserve Bank of Australia is now willing to deal with all major financial institutions, both bank and nonbank, that are members of the Reserve Bank Information and Transfer System (RITS), an electronic system for the settlement of large-value cash and Commonwealth Government Securities (CGS) transactions. (2) Currently, PITS has 137 members--54 banks, 3 special service providers, and 80 nonbanks--but in practice the Bank deals regularly with around a dozen institutions. The Bank conducts two types of transactions. It may buy (sell) outright CGSs of less than about eighteen months to maturity. It also accepts CGS, state and territory Commonwealth government, and certain supranational securities in repurchase agreements. In fact, 80 percent of open market transactions take the form of repos. The average maturity of the repo book has lengthened in recent years from two days in the mid-1990s to 12 days in 2000-01. In addition--and to an increasing extent-- the Reserve Bank may choose to do a foreign exchange swap (basically a repo, with both a spot delivery and an agreement for future reversal, based on foreign exchange rather than securities) for purposes relating to liquidity management rather than to exchange rate stabilization. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Australia's Approach to Monetary Policy
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.