Monetary Policy

Monetary Policy


The Reserve Banks Charter was written in 1959. It’s broader than the Charter at most other central banks. It’s got three key elements The Reserve Bank is responsible for low and stable inflation For full employment and promoting the general welfare of the Australian people. I’m glad we’ve got this broad mandate It’s as I said, it’s broader than most other central banks that many other central banks just have a mandate to control inflation In the end low inflation is not the goal in and of itself It’s delivering low inflation to to promote the economic prosperity of the Australian people The Reserve Bank board sets the cash rate on the first Tuesday of every month The cash rate is the rate that banks use to lend to one another in the short term money market But it has a very large effect on mortgage rates in the economy, on the rates that people get on their Savings and affects asset prices and the exchange rate. So it’s a very important interest rate Sometimes we need to raise interest rates to achieve those objectives. If the economy is growing very strongly demands Very buoyant and that’s pushing up prices We might need to raise interest rates to slow the economy to get things back on to an even keel Conversely if things are weak and demand is not very strong, inflation’s low We might need to lower interest rates to stimulate demand and get inflation back up towards the target When we change interest rates people obviously notice it in their mortgages and that affects how much they spend when rates are going up They have less to spend and when rates are going down. They have more to spend Changes in the cash rate also affect the exchange rate. If we raise interest rates The currency tends to appreciate and when we lower interest rates the currency tends to depreciate changes in interest rates can also affect people’s confidence in Some circumstances lower interest rates makes people feel happier. In other cases, a higher interest rates make people feel less happy and so that affects their spending. Changes in interest rates also affect asset prices when lower when we have lower interest rates that tends to push up asset prices and if asset prices are higher people might feel wealthier and If they’re wealthier They might spend more and conversely low rates might mean lower asset prices and people don’t feel as confident. They don’t spend as much Our board is made up of mainly outside people who are either business people or people who have experience in other areas of public policy or public service. I think that’s really valuable What I notice about business people and people have their broader experience is they’re very good at making decisions under uncertainty And much of what the Reserve Bank board is doing is making a very important decision in a quite an uncertain world So we’re we’re trading off things all the time And we’re trying to make the best decision in the welfare of the best welfare for people of Australia And the business people and people with outside expertise are very good at doing that Daresay, they’re actually better doing it than economists. So I like kind of having this broad perspective on our board I think it also helps the legitimacy and the public accountability of the board it’s much better to have interest rate decisions made by this broad group of people rather than Primarily made by technical academic economists. So I’m a strong Fan of our board current board structure, it’s quite different from the boards of most other central bank’s At a very practical level we operate a flexible medium term inflation target Our objective is to deliver an average rate of inflation for the community of between two and three percent over time We’re prepared to allow the inflation rate to move up and down over time But we want people to be confident that over time inflation in Australia will be two point something and if people are confident about they can go about making their decisions about saving investment and spending With assurance that inflation will be low and unstable if the value of their money will be protected because it won’t be eroded by inflation And they can have certainty about what the price level we do over time

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