The Reserve Bank of Australia (RBA) is Australia’s central bank and banknote issuing authority. It has had this role since 14 January 1960, when the Reserve Bank Act 1959 removed the central banking functions from the Commonwealth Bank.

The Reserve Bank is Australia’s central bank, as established under legislation. The Bank has five broad responsibilities:

• determine and implement monetary policy in pursuit of price stability and full employment
• foster the stability of the financial system
• support a secure, stable and efficient payments system
• deliver efficient and effective banking services to the Australian Government
• provide secure and reliable Australian banknotes.

Broadly speaking, and enshrined in legislation, “[i]t is the duty of the Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank under this Act, the Banking Act 1959 and the regulations under that Act are exercised in such a manner as, in the opinion of the Board, will best contribute to the stability of the currency of Australia; the maintenance of full employment in Australia; and the economic prosperity and welfare of the people of Australia.”

The Bank’s mission is to promote the economic welfare of the Australian people through our monetary and financial policies and operations. Their vision is “… to be a world-leading central bank that is trusted for our analysis, service delivery and policies”.

Monetary Policy

One of the main functions of the RBA is to implement monetary policy, which involves setting interest rates and managing the supply of money in the economy. The RBA uses a number of tools to achieve its monetary policy objectives, including setting the cash rate, which is the interest rate at which banks can borrow and lend funds to each other. By adjusting the cash rate, the RBA can influence the level of borrowing and spending in the economy, which can help to maintain stable prices and full employment.

RBA Press Releases: The RBA meets on the first Tuesday of every month, with the exception of January, and occasionally ‘when required, in order to make monetary decisions. The monetary policy decisions are announced via a press release on the RBA website at 2.30pm to detail their position.

It is this cash rate decision that has an impact on your variable rate. As the RBA increases (or decreases) the cash rate, the banks will pass on the increased cost of funds in the cost of their mortgage product.

Cash Rate Graph: The graphs shows the cash rate, inflation, and CPI (Consumer Price Index). The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households (details found in our article “What is the CPI“)

The bank’s main policy role is to control inflation levels within a target range of 2-3%, by controlling the unemployment rate according to the NAIRU, via controlling the official cash rate. The NAIRU was implemented in most Western nations after 1975, and has been maintained at a target of 5-6% unemployment. The average unemployment rate in Australia between the end of the second world war and the implementation of the NAIRU was consistently between 1-2%. Since the implementation of the NAIRU, the average unemployment rate in Australia has been close to 6%.

What is NAIRU?: Non-accelerating inflation rate of unemployment (NAIRU) is a theoretical level of unemployment below which inflation would be expected to rise. It was first introduced as NIRU (non-inflationary rate of unemployment) as an improvement over the “natural rate of unemployment” concept. The flawed and highly criticised ‘natural’ unemployment rate is mainly determined by the economy’s supply side, and hence production possibilities and economic institutions. If these institutional features involve permanent mismatches in the labor market or real wage rigidities, the natural rate of unemployment may feature involuntary unemployment. The natural rate of unemployment is a combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.

Academic concepts aside, the inflation rate of 2-3% is the RBA target, and this inflation rate has introduced a historically stable economy.

Bank Notes

The RBA also plays a key role in issuing Australia’s currency. The bank is responsible for printing and distributing banknotes, and it also manages the country’s gold and foreign exchange reserves. In addition to these traditional functions, the RBA also provides banking services to the Australian government and acts as a lender of last resort to the financial system.

Other RBA Responsibilities

In addition to conducting monetary policy and issuing currency, the RBA also has a number of other responsibilities. These include promoting the stability of the financial system, conducting research on economic and financial issues, and providing advice to the Australian government on a range of economic and financial matters. The RBA also works closely with other central banks and international organisations to promote global economic stability and cooperation.

Overall, the Reserve Bank of Australia is a critical institution in the Australian economy. Its policies and actions play a vital role in maintaining price stability, fostering economic growth, and ensuring the stability of the financial system.

RBA Resources

The following is a copy of the Reserve Bank Act, 1959, and provides further insight into core RBA responsibilities. As a copy, it cannot be relied upon for accuracy, so you might choose to reference the austlii.edu website.

The Role and Functions of the RBA

  Video: The Reserve Bank of Australia is Australia’s central bank. Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation’s banknotes. The Bank also manages Australia’s foreign exchange reserves and provides banking services to the government. Source: Reserve Bank of Australia.

The Reserve Bank of Australia and Monetary Policy

  Video: The Reserve Bank of Australia is responsible for Australia’s monetary policy. Its monetary policy objective is defined as an ‘inflation target’ of consumer price inflation of 2–3 per cent, on average, over the medium term. To meet this, the Bank influences interest rates in the economy by setting a target for ‘the cash rate’. Influencing interest rates in this way affects the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation. Philip Lowe, Governor. Source: Reserve Bank of Australia.

Links to Relevant Resources

• RBA Monetary Decision Page
• Monetary Policy Framework – treasury.gov.au
• RBA on Wikipedia
• RBA website