A pillar of the nation’s economy
We’ve read and heard a lot about the Reserve Bank of Australia lately – but what is it and what does it do?
The Reserve Bank of Australia (RBA) is the nation’s central banking institution, and it plays a pivotal role in our financial stability and economic prosperity.
Despite its importance to the way our nation functions, many Australians know very little about it.
What we do know, perhaps, is that it regularly makes pronouncements that effect our mortgages (or, indirectly, the amount we pay in rent). And in recent times, many homeowners have come to dread its determinations, which have added hundreds of dollars to their loan repayments.
As the primary monetary authority, the RBA is charged with several critical functions that ensure the smooth operation of the nation’s financial system.
Its origins go back to the creation of the Commonwealth Bank of Australia (CBA) in 1911. Being government owned at the time, the CBA took on the functions of a central bank, but these responsibilities were split off in the Reserve Bank Act 1959.
Established on 14 January 1960, the RBA has a primary mandate to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.
To achieve these goals, the RBA engages in a variety of activities, including the management of the nation’s money supply, issuing currency, and serving as the banker to the Australian Government and commercial banks.
The RBA board has nine members. Three are ex officio members: the RBA Governor and Deputy Governor, and the Secretary to the Treasury.
The other six non-executive members are appointed by the Treasurer to serve terms of up to five years, which can be renewed.
By law, members of the board may not be a director, officer, or employee of an authorised deposit-taking institution.
The board will meet eight times a year in 2024 and beyond, down from 11 in previous years.
It oversees the RBA’s most important function, which is the formulation and implementation of monetary policy.
Monetary policy is used to control the supply of money in the economy to achieve low and stable inflation, which is a crucial element for economic stability and growth.
By influencing the level of spending and saving through its monetary policy decisions, the RBA aims to ensure sustainable economic growth and reduce the likelihood of inflationary or deflationary cycles.
The RBA is also responsible for maintaining the stability of the financial system, promoting the safety and efficiency of the payments system, and managing Australia’s gold and foreign exchange reserves.
At the heart of the RBA’s monetary policy strategy is the setting of the official cash rate, which is the interest rate on overnight loans in the interbank market.
This rate is a powerful tool in the central bank’s arsenal for influencing overall economic activity. When the RBA adjusts the cash rate, it signals its stance on monetary policy to the financial markets and the broader economy.
For instance, lowering the cash rate can stimulate economic activity by making borrowing cheaper, thereby encouraging spending and investment.
Conversely, raising the rate can help cool down an overheating economy by making borrowing more expensive, which can dampen spending and investment.
These decisions are informed by a wide range of economic data, including inflation rates, employment figures, and global economic conditions.
The aim is to calibrate the level of monetary stimulus needed to achieve the inflation target – generally set at 2-3% over the medium term – while also supporting sustainable economic growth.
The bank’s board will meet again on 6-7 May 2024 – and Australians will be listening closely for any change to the official rate, which is currently 4.35%.
With a series of rises last year, and a “steady” decision at the most recent meeting, many of us are holding out for the rate to be lowered.
Experts tend to agree that the rate will go down this year, but not necessarily at the next meeting.
Related reading: RBA
