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What the RBA does: and why

Video Transcription

By now you’d know that at their June meeting the Reserve Bank of Australia dropped their official cash rate by 0.25% as had widely been expected.

And much of what could be said about this has already been said but in today’s Property Insider chat with Dr. Andrew Wilson I’d like to look at a different angle.

You see… most of us hear about the Reserve Bank of Australia or RBA when it makes an interest rate announcement on the first Tuesday of 11 months of the year.

But what does the RBA really do?
What are its aims and how does it achieve them?

And we’ll also delve a bit behind this rate cut and give you some perspective.
Watch as we discuss

•    The difference between monetary and fiscal policy
Monetary policy’ is what central banks do to protect and guide their economies. It is different from ‘fiscal policy’, which is what governments do to affect the economy

•    The role of the RBA
-    Print plastic money. The RBA is responsible for designing, printing, issuing, circulating and destroying Australian bank notes, but has no control over coins. The RBA was the first currency issuer in the world to issue plastic notes.

-    Oversee the payments system - The RBA is also responsible for administering the computer system that banks use to ensures that customers of different banks can pay each other. The transfer non-cash payments between banks. The RBA estimated in 2014. Approximately $180 billion goes through this system every day.

-    Promote financial stability

-    The RBA works with the Australian Prudential Regulation Authority (APRA) and other regulators to promote Australia’s financial stability. For example, it warns the general public of economic risks through speeches, advises the government and regulators on how to protect against these risks, and works with international organisations on the setting of global rules, such as Basel III.

-    Act like a regular bank - The RBA is also the government’s banker. For example, if you were lucky enough to receive a tax refund this financial year, that money was transferred from the Tax Office’s bank account at the RBA to your bank account.

-    The RBA also provides banking services to overseas international organisations like the Organization for Economic Cooperation and Development (OECD).

-    Target inflation - The basis of Australia’s monetary policy is the inflation target. This has been so since 1996.

•    What’s driving low inflation?
Inflation was just 1.3% over the year to the March quarter. This reflects a combination of weak demand, high levels of spare capacity & underutilised workers, intense competition, technological innovation & softish commodity prices. The problem is that inflation has been undershooting RBA forecasts and the inflation target for some time, threatening its credibility.

•    What’s wrong with low inflation anyway?
Surely low price rises or falling prices are good? So, many have suggested the RBA should just lower its inflation target.

•     Will the rate cuts help?
The level of household debt is more than double that of household deposits, so the household sector is a net beneficiary of lower interest rates. The responsiveness to changes in spending power for a family with a mortgage is far greater than for retirees. And, even if many with a mortgage just let their debt get paid off faster in response to falling rates this provides an offset to the negative wealth effect of the fall in house prices, reducing pressure to cut spending. And RBA rate cuts help keep the $A lower. So, while rate cuts may not be as potent with higher household debt levels and tighter lending standards, they should provide some help for households with a mortgage and for businesses that compete internationally.

•    Should the RBA use quantitative easing?
As the cash rate falls, we are likely to see an increasing debate around whether the RBA will use quantitative easing - ie using printed money to buy bonds to inject cash into the economy.


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