Reserve Bank of Australia Annual Report – 2005 Governor's Foreword
The period covered by this report – the financial year 2004/05 – was a period of relative calm as Australia's economic expansion continued into its 14th year. Growth in the world economy remained strong and the accompanying rises in commodity prices provided an expansionary backdrop to the Australian economy. At the same time, the most overheated part of the economy – the housing sector – cooled, and with it household consumption. Both business investment and employment continued to grow strongly, while inflation remained stable.
There was only one change to monetary policy during the year – a 25 basis point tightening in March. This was the fifth small rise in the past three years, making this the most gradual tightening phase in recent memory. More detailed accounts of monetary policy and economic developments can be found in the quarterly Statement on Monetary Policy, testimony to the House of Representatives Standing Committee on Economics, Finance and Public Administration, and various speeches by senior members of staff.
As well as monetary policy, the other main policy area for which the Reserve Bank is responsible is the stability of the financial system. This is divided into two main areas – the payments system and financial system stability itself. The work on the payments system is detailed in the Annual Report of the Payments System Board and in various media releases. The main publication of System Stability Department is the twice-yearly Financial Stability Review, which is presented to the Council of Financial Regulators before being released to the public. Both these publications contain extensive accounts of developments in their respective areas.
This Annual Report presents the Reserve Bank's Financial Statements and focuses on those activities of the Bank that have not been covered in other regular publications. Among the various activities that occurred during the year, the following are worthy of mention.
As was the case last year, the Reserve Bank again had to widen the range of securities in which its Domestic Markets Department deals to make up for the lower supply of Commonwealth Government securities. As at September 2004, the Reserve Bank's outright holdings of longer – dated domestic securities have been broadened to include semi-government paper. In the foreign exchange market it was a quiet year, with the Reserve Bank accumulating another A$2.4 billion of foreign exchange to restore international reserves, after the period of intervention in 2000 and 2001.
Australia continues to participate actively in international economic relations and will host the 2006 G-20 meeting of finance ministers and central bank governors, to be held in Melbourne. The International Department of the Reserve Bank put in a big effort last year as part of the EMEAP working group that established the Asian Bond Fund 2. This is an important initiative that enables central banks and other fund managers to invest in local-currency denominated sovereign and quasi-sovereign bonds issued by Asian governments.
Major attention is being given by Note Issue Department to improve the quality of lower-denomination currency notes in circulation. This involves increasing the number of $5 and $10 notes that are returned by banks and armoured car companies for inspection and replacement if required.
Note Printing Australia had a busy year, producing 160 million notes for the Reserve Bank and 234 million notes for export. Securency, the joint-venture company that produces the polymer substrate, is operating at full capacity servicing its overseas customers, with Chile becoming the 23rd country to issue bank notes printed on Securency's polymer substrate.
The Museum of Australian Currency Notes was opened at the Macquarie Street end of the ground floor of Head Office in Sydney in late February. As well as exhibiting all the series of Australian notes issued since the national currency was established in 1910, it shows specimens of every note issued worldwide on polymer.
In late 2004, the Reserve Bank purchased 1.48 hectares of land in outer metropolitan Sydney on which to construct a business resumption site. In early 2005 a design was prepared for the facility and presented to the Parliamentary Joint Standing Committee on Public Works. The Committee approved the proposal, which is estimated to cost $38 million. Work will commence on construction in early 2006, with final commissioning by mid 2007.
There was a small rise in staff numbers during the year but the level has been in the eight hundreds now for five years or so. A recent innovation was the establishment (with a joint-venture partner) of a childcare facility in the CBD for pre-school-age children of Reserve Bank staff.
The Australian financial system is undergoing continual change and Reserve Bank staff, along with private-sector participants, are constantly having to adapt to these changes. I am confident that our staff will continue to demonstrate a high degree of flexibility as well as a strong commitment to maintaining high standards in this changing environment. In addition to keeping up with technological changes that affect the financial infrastructure we provide, there are numerous other changes affecting the way we work. For example, since becoming the regulator of the retail payments system, we find that we are spending a lot more time in Court, and have had to adapt our work to constant legal scrutiny. Similarly, as financial markets become more sophisticated, specialised statistical surveys have had to be undertaken to fill the gaps in our knowledge. When possible, we contract the Australian Bureau of Statistics to do this for us; if not, we employ the services of commercial market research firms. As we go forward there will no doubt be many other challenges, but I am sure that the staff of the Reserve Bank have the resourcefulness to meet these challenges.
IJ Macfarlane
Chairman, Reserve Bank Board
17
August 2005