In a Nutshell
This series provides information about key economic concepts, interesting topics, and the role of the Reserve Bank on one page, telling the story in a nutshell.
Roles and Functions of the Reserve Bank of Australia
Describes the different roles and functions of the Reserve Bank of Australia.
Monetary Policy
The Reserve Bank conducts monetary policy to achieve its goals of price stability, full employment and the economic prosperity and welfare of the Australian people.
Operations in Financial Markets
The Reserve Bank operates in domestic and international financial markets. This is to implement monetary policy, help ensure the smooth functioning of payments and manage Australia's foreign exchange reserves.
Financial Stability
The Reserve Bank is responsible for overall financial system stability. It does this by managing and providing liquidity to financial institutions, monitoring risks and cooperating with other organisations as part of the Council of Financial Regulators.
Payments and Financial Markets Infrastructure
The Reserve Bank has responsibility for ensuring the stability, efficiency and competitiveness of the payments system. It also has a regulatory and operational role in ensuring that the payments infrastructure promotes financial stability.
Banknotes
The Reserve Bank is responsible for producing and issuing Australia's banknotes. Its goal is to produce banknotes that everyone can trust, both as a means of payment and a store of value.
Banking Services
The Reserve Bank provides a range of banking services to the Australian Government and overseas central banks. Payments and transactions often relate to the everyday lives of Australians, such as social security benefits and emergency payments to people affected by natural disasters.
Monetary Policy in Australia
Describes why and how the Reserve Bank conducts monetary policy.
The Reserve Bank conducts monetary policy to achieve its goals of price stability, full employment, and the economic prosperity and welfare of the Australian people.
It does this by targeting inflation between 2-3%. The cash rate is the primary tool used to manage inflation. The RBA has, at times, also used other tools, including targeting longer-term interest rates and buying and selling government bonds.
The Reserve Bank Board meets eight times a year, on the first Tuesday of the month, to determine the appropriate monetary policy settings.
Monetary policy, including the cash rate, has a strong influence over interest rates in the economy, such as lending and deposit rates.
More expansionary monetary policy, like a reduction in the cash rate, typically stimulates spending and inflation. Tighter monetary policy, like an increase in the cash rate, typically dampens spending and inflation.
If inflation is likely to be too high (low) for too long, the Reserve Bank Board would typically tighten (loosen) monetary policy, such as by increasing (decreasing) the cash rate.
Monetary Policy Implementation in Australia
Describes how the Reserve Bank implements monetary policy and keeps the cash rate as close as possible to its target.
The Reserve Bank has several monetary policy tools. It conducts transactions in domestic financial markets to implement monetary policy.
Prior to the COVID-19 recession, the cash rate target was the only actively used tool of monetary policy. The Reserve Bank kept the cash rate on target by conducting ‘open market operations’.
The Reserve Bank operated a ‘corridor system’, lending cash to banks a little above the cash rate target and accepting deposits a little below the cash rate target.
During the COVID-19 recession, the Reserve Bank actively used tools in addition to the cash rate, including ‘forward guidance’, price and quantity targets for the purchase of government bonds and a ‘term funding facility’.
In addition to reducing longer-term interest rates, these policies have substantially increased the amount of cash in the banking system, reducing banks’ need to borrow cash from the Reserve Bank or each other.
As a result, the Reserve Bank now effectively operates a floor system. The cash rate trades just above the interest rate at which banks can deposit cash with the Reserve Bank.
The Inflation Target
Defines Australia's inflation target and explains why and how it is used.
The Reserve Bank has an inflation target to achieve the goals of price stability, full employment, and prosperity and welfare of the Australian people.
Australia’s inflation target is to keep consumer price inflation between 2–3%.
Low and stable inflation reduces uncertainty in the economy, helps people make saving and investment decisions, and is the basis for strong and sustainable economic growth.
The Reserve Bank adopted the inflation target in the early 1990s. The Bank and the government agree on the importance of the inflation target and formally set out this agreement in the Statement on the Conduct of Monetary Policy.
The Reserve Bank uses the cash rate and other monetary policy tools to stimulate or dampen economic activity such that inflation is in the target range.
If inflation is likely to be too high (low) for too long, the Reserve Bank Board would typically tighten (loosen) monetary policy to bring inflation back to target, such as by increasing (decreasing) the cash rate.
Financial System Regulation in Australia
Describes who is responsible for financial system regulation in Australia.
The Council of Financial Regulators (CFR) is the coordinating body for Australia's main financial regulatory agencies. It includes the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury.
The role of the CFR is to contribute to the efficiency and effectiveness of regulation and to promote the stability of the Australian financial system. The Governor of the RBA chairs the CFR and each of the agencies plays a different role in promoting financial stability.
The RBA is responsible for promoting overall financial system stability. It does this by managing and providing liquidity to institutions, regulating the payments system (including financial market infrastructures) and monitoring risks in the financial system.
Financial Stability
Describes why and how the Reserve Bank helps maintain a healthy and stable financial system.
The Reserve Bank helps maintain a healthy and stable financial system. This is fundamental to the economic prosperity and welfare of the Australian people.
In a healthy financial system, money is channelled between savers and borrowers so that different activities, like spending by households or investment by businesses, can be undertaken.
A healthy financial system is resilient so that money keeps flowing even when the economy slows or there are disruptive events.
The Reserve Bank ensures that there are adequate funds in Australia's financial system. During the global financial crisis, the Reserve Bank provided temporary extra funding to the system.
In normal times, the Reserve Bank watches for emerging risks in the financial system. Twice a year it publishes a financial ‘health check’ in the Financial Stability Review. Where risks pose a threat to the financial system, the Review explains the issue and the policy response.
The Reserve Bank chairs the Council of Financial Regulators, which includes the prudential regulator APRA, the corporate and financial services regulator ASIC, and the Australian Treasury. The Council meets at least four times a year to discuss current issues and policies. In a financial crisis, it coordinates responses across the member agencies.
Financial Aggregates
Defines money and credit and describes how they can be used to understand developments in the economy.
The Reserve Bank publishes and monitors data on the stock of money and credit in Australia. These data are called the financial aggregates. They can be used to help understand developments in the economy.
Money can be held in different forms – for example, as banknotes in your wallet and as deposits in the bank. The main measures of money are the money base, currency, M1, M3 and broad money.
Credit is a measure of funds borrowed from the banking system. People borrow to purchase things such as houses, cars and holidays. Businesses also borrow to invest in projects and buy assets. Total credit can be broken down into housing credit, personal credit (such as on credit cards) and business credit.
Monitoring changes in the stock of money and credit is important because it can help us understand more about what's happening in the economy. Monitoring changes in credit can also be helpful for identifying risks to financial stability.
Higher credit growth tends to be associated with more positive economic conditions (e.g. people wanting to borrow and spend more and banks being willing to lend more). Lower credit growth tends to be associated with less positive economic conditions. But rapid credit growth could signal growing risks to financial stability, particularly if debt levels are already high.
Changes to the cash rate can influence credit growth because of the effect that the cash rate has on other interest rates related to credit, such as on housing loans, credit cards and business loans.
How Australians Pay
Describes some of the most common payment methods used when paying for goods and services.
When you pay for something, you can usually choose how you pay. Here are some of the most common payment methods. Debit card 51%. Credit card 26%. Cash 13%. Other 10%.
When you pay – for example, in a shop – the shop owner faces costs for accepting your payment, including bank fees and the opportunity cost of their time. These costs depend on how you pay.
Cash is usually a low-cost method, particularly for small transaction sizes. A shop owner might not pay any fees related to the use of cash, but may face other costs (for example, time taken to deposit the cash received).
Debit cards (which use your own money from your bank account) are generally lower cost than credit cards.
Shop owners usually pay higher fees to accept credit cards (which borrow money from your card provider). Fees vary depending on the type of card, and are typically higher for cards that provide rewards (such as frequent flyer points) to the cardholder.
If you use a more expensive payment method, the shop owner has to pay for it. Shop owners can either increase the prices of what they sell for all customers, or can pass on the cost directly to customers that use high-cost methods by adding a surcharge, which encourages people to switch to low-cost methods.
Banknotes in Australia
Describes the role of the Reserve Bank in producing Australia's banknotes and highlights some common features of the banknotes.
The Reserve Bank is responsible for designing, producing and issuing Australia's banknotes. Its goal is to produce banknotes that everyone can trust as a payment mechanism and a store of value.
Australia has five denominations of banknotes: the $5, $10, $20, $50 and $100. There are more than 2 billion banknotes on issue, worth more than $100 billion.
Australia has very low levels of counterfeiting. The Reserve Bank keeps our banknotes safe by researching anti-counterfeit technologies and upgrading security features.
Australia's banknotes are printed on polymer (plastic). They start out as plastic pellets that are melted down into large sheets, and then designs are printed onto them.
Each banknote is produced with a unique serial number. The two letters represent the banknote's position on the sheet and the first two numbers indicate what year the banknote was printed.
Polymer banknotes are recyclable. At the end of their life cycle, old and damaged banknotes can be recycled into products such as building materials and compost bins.