Statement on the Conduct of Monetary Policy The Treasurer and the Monetary Policy Board
The Statement on the Conduct of Monetary Policy (the Statement) records the common understanding of the Monetary Policy Board and the Government on key aspects of Australia’s monetary and central banking policy framework.
The Statement seeks to foster a sound understanding of the nature of the relationship between the Monetary Policy Board and the Government, the objectives of monetary policy, the mechanisms for ensuring transparency and accountability in the way monetary policy is conducted, and the independence of the Reserve Bank.
The Statement has been shaped by the Reserve Bank and Government’s response to the Review of the Reserve Bank (the Review). The Review and its recommendations focus on strengthening Australia’s monetary policy framework and decision-making, enhancing accountability and transparency, and maintaining a high performing institution.
Relationship between the Reserve Bank and the Government
The Governor, Deputy Governor and Monetary Policy Board are afforded substantial independence under the Reserve Bank Act 1959 (the Act) to conduct the monetary and financial stability policies of the Reserve Bank to achieve the objectives as set out in the Act. The Government supports and will continue to uphold the Reserve Bank’s independence. For its part, the Monetary Policy Board will serve the best interests of the people of Australia with honesty and integrity.
New appointments of external members to the Monetary Policy Board will be made by the Treasurer from a shortlist of candidates. A panel comprising the Secretary to the Treasury, the Reserve Bank Governor and an independent third party will compile the shortlist through a process that is transparent and focused on ensuring the Monetary Policy Board has the right balance of skills and experience to best discharge its functions. To support this, the Government publishes a skills matrix for the Monetary Policy Board, and will update this as needed on the advice of the Secretary, Governor and Monetary Policy Board.
The Secretary to the Treasury is an ex officio member of the Monetary Policy Board. The Secretary to the Treasury acts in their individual capacity, and not at the direction of the Treasurer. The Government and Monetary Policy Board acknowledge the unique responsibility of the Secretary to the Treasury to provide independent insight on the outlook for the economy and fiscal policy.
The Government recognises the role that sound fiscal management plays in achieving the Monetary Policy Board’s objectives. In recognition of this, the Reserve Bank and the Government (through the Treasury) commit to working together to enhance their understanding of prevailing macroeconomic conditions and the impact that monetary and fiscal policy settings have in influencing these conditions.
The Government also recognises the importance for the Board’s policy objectives of the Reserve Bank having a strong balance sheet and the Treasurer will pay due regard to that when deciding each year, in consultation with the Governance Board, on the distribution of the Reserve Bank’s earnings under the Act.
Objectives of Monetary Policy
The Reserve Bank Act 1959 sets out the specific goals for monetary policy. The overarching objective for monetary policy is to promote the economic prosperity and welfare of the Australian people both now and into the future. The Monetary Policy Board can best fulfill this mandate by conducting monetary policy in a way that will best contribute to both price stability and full employment.
The Monetary Policy Board and the Government agree that a flexible inflation target is the appropriate framework for achieving price stability, recognising the importance of low and stable inflation. They agree that an appropriate goal is consumer price inflation between 2 and 3 per cent. This approach supports the anchoring of inflation expectations, while recognising that all outcomes within the target range are consistent with the Monetary Policy Board’s price stability objective. The Monetary Policy Board sets monetary policy such that inflation is expected to return to the midpoint of the target. The appropriate timeframe for this depends on economic circumstances and should, where necessary, balance the price stability and full employment objectives of monetary policy.
The Government’s objective is sustained and inclusive full employment where everyone who wants a job can find one without searching for too long. The Monetary Policy Board and Government agree that the Monetary Policy Board’s role within this is to focus on achieving sustained full employment, which is the current maximum level of employment that is consistent with low and stable inflation. The Monetary Policy Board commits to regularly communicating its assessment of how conditions in the labour market stand relative to sustained full employment, drawing on a range of indicators and recognising that full employment is not directly measurable and changes over time.
The Monetary Policy Board commits to clearly communicating how it is balancing its inflation and full employment objectives. More generally, when inflation is expected to be significantly away from the midpoint of its target of between 2 and 3 per cent or labour market conditions are expected to deviate significantly from those consistent with full employment, the Board will communicate how long it expects it will be before it again meets each of its objectives and why.
Monetary Policy Tools
The Monetary Policy Board’s primary approach to implementing monetary policy will be through varying the level of the cash rate target.
The Monetary Policy Board and Government acknowledge that there may be circumstances under which other monetary tools may help to achieve the Board’s objectives for monetary policy. They agree that the Board should use its judgement to determine what these tools are, when they are needed and how they are to be deployed most effectively.
The Monetary Policy Board will communicate a framework to guide the use of additional monetary tools, including the benefits, costs and risks associated with available tools. It will draw on a range of inputs, including international experience, independent expert assessments and lessons from the Reserve Bank’s use of additional monetary tools.
The framework will also detail the decision-making approach that the Board intends to adopt when it believes that there may be a need to use or discontinue alternative monetary tools. This includes how monetary policy will work together with other arms of policy. In addition, the framework will set out considerations at the outset about how these additional tools might be exited under different scenarios.
Framework and Tool Reviews
The Monetary Policy Board and Government (through the Treasury) agree to work together to conduct and publish a formal review of the monetary policy framework and tools every five years, drawing on independent experts with a wide range of viewpoints. These reviews will help to inform future changes to this Statement.
Transparency and Accountability
The Monetary Policy Board takes a number of steps to ensure transparency and accountability in its decision-making. This includes regularly communicating the factors affecting its decisions. The Monetary Policy Board agrees to publish statements announcing and explaining each of its monetary policy decisions and to release minutes of its meetings. The Governor will hold media conferences after each Board meeting. In addition, the Governor agrees to continue to be available to report twice a year to the House of Representatives Standing Committee on Economics, and to other Parliamentary committees as appropriate.
The Monetary Policy Board agrees to publish information relevant to its decisions. This includes commentary and analysis on the economy and outlook provided through the Reserve Bank’s publications, such as its regular Statement on Monetary Policy, Bulletin and Financial Stability Review. The Reserve Bank will also ensure that insights from its business and community liaison are published, along with assessments of potential output and full employment, and detailed forecast data and assumptions including for the cash rate.
The Monetary Policy Board will publish an unattributed record of votes in the Board’s post-meeting statement and will publish Board papers after seven years. Members are expected to conduct at least one speech or public engagement each year. The Monetary Policy Board will convene and engage with an expert advisory group on monetary policy to provide the Board with a wide range of external views.
Financial Stability
The Monetary Policy Board will continue to contribute to financial stability by setting monetary policy to achieve its inflation and full employment objectives. The Reserve Bank holds a central position in the financial system, as the ultimate provider of liquidity to the system and key participant in financial crisis management. In addition, the Board and the Bank will contribute to financial stability by:
- working in close cooperation with the agencies represented on the Council of Financial Regulators to identify and monitor risks to financial stability, and how those risks might interact with monetary policy
- working with the Government and other agencies, where needed, to coordinate policies that would address these risks
- providing adequate liquidity to the financial system, including in exceptional circumstances
- publicly communicating its assessment of financial stability risks, including through regular publications and speeches as appropriate
- participating, where appropriate, in the development of financial system policies.
The Reserve Bank’s mandate to uphold financial stability does not guarantee solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions.
Cooperation between the Reserve Bank’s boards
The Monetary Policy Board has the power to do all things necessary or convenient to be done for or in connection with the performance of its functions.
The Monetary Policy Board commits to working constructively with the Payments System Board and Governance Board to achieve the Reserve Bank’s objectives. The Government expects the Monetary Policy Board to maintain open communication and seek a collaborative approach when its responsibilities converge with those of the other boards.
The Monetary Policy Board will work cooperatively with the Payments System Board (which has explicit responsibility for payments system stability) as required in support of financial stability.
The Monetary Policy Board will have regard to the duties of the Governance Board as the accountable authority of the Reserve Bank for the purposes of the Public Governance, Performance and Accountability Act 2013. The Monetary Policy Board will also support the Governance Board’s efforts to foster an open and dynamic culture that values constructive debate. It commits to supporting the further development of the Reserve Bank’s research and modelling capabilities, including by overseeing the Bank’s research strategy.