Monetary Policy and Recent Economic Developments

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Monetary Policy and Recent Economic Developments

• Teacher and Student Guide
• Last updated 9 November 2009
• Note The attached slides summarise some features
  of monetary policy formation and recent economic
  trends in Australia. Further information is
  available on the RBA website (www.rba.gov.au) ,
  including a comprehensive examination of economic
  and financial sector developments in the latest
  Statement on Monetary Policy and the Financial
  Stability Review. These slides will be updated
  shortly after the release of each quarterly
  Statement.

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Reserve Bank of Australia

• Responsible for
• Monetary policy
• Payments system stability efficiency
• Financial system stability
• Issuing Australias currency notes
• Banker to the government
• Managing foreign exchange reserves

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Reserve Bank Board

• Responsible for
• - the Banks monetary and banking policy
• - the Banks policy on all other matters, except
  payments system policy (addressed by the Payments
  System Board)
• Nine members Governor, Deputy Governor,
  Secretary to the Treasury and six external
  members
• Meets first Tuesday each month, except January

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Objectives of Monetary Policy

• The objectives specified in the Reserve Bank Act
  (1959) are
• Stability of the currency
• Maintenance of full employment
• Economic prosperity and welfare of the people of
  Australia

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How does the RBA achieve its objectives?

• By maintaining a steady and low inflation rate,
  consumers and producers can efficiently respond
  to relative price movements
• The RBA adopted an inflation targeting regime in
  1993, which was formalised in an agreement with
  the government in 1996, and updated in 2003, 2006
  and 2007
• The price objective is to keep annual inflation
  between 2 and 3 per cent, on average, over the
  cycle
• While CPI inflation is the target, various
  underlying measures which abstract from
  temporary large price increases and decreases
  help discern future trends in CPI (or headline)
  inflation

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How does the RBA affect inflation?

• The RBA Board sets the policy interest rate
  (termed the cash rate the rate banks charge
  each other for overnight funds) and uses its
  liquidity operations to achieve this rate
• Changes in the cash rate affect mortgage and
  other lending and deposit rates in the economy
• Changes in these interest rates, along with any
  exchange rate response, in turn affect the level
  of private consumption and investment
• Over time inflation is likely to be steady and
  low when total spending is kept close to the
  level of output

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Global environment
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Domestic Activity
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Price Pressures
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Policy Response
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For more information . . .

• RBA website (http//www.rba.gov.au/ )
• Chart Pack (updated monthly)
• Education
• Statistics