Monetary Policy in Australia

Econ 311 Essay

Monetary Policy

Framework and conduct of monetary policy in Australia

In the Australia macroeconomic policy environment, monetary policy is one of the three arms of macroeconomic policy available to the government, while the other two arms are fiscal policy and wages policy. The RBA conducts open market operations daily, ordinarily to offset flows between the private banking system and the government, ensuring that there are adequate funds for the market to operate and the cash rate to remain on target. It does so predominantly by using repurchase agreements (repos) where it purchases a security with an agreement to sell it back at a future date at an agreed price. Monetary policy refers to the actions taken by the Reserve Bank of Australia (RBA) to affect monetary and financial conditions in the money market to help achieve economic objectives. Monetary policy's principal medium-term objective is to control inflation; these objectives have found practical expression in a target for inflation, of 2-3% per annum and to maintain full employment at the NAIRU (the non-accelerated inflation rate of unemployment) between 5% and 7%. In the long run, monetary policy’s objective is to maintain a sustainable growth economy. The first two objectives lead to the third, and ultimate, objective of monetary policy, these objectives allow the Reserve Bank Board to focus on price (currency) stability while taking account of the implications of monetary policy for activity and, therefore, employment in the short term. Price stability is a crucial precondition for sustained growth in economic activity and employment.

Since the floating of the exchange rate in the late 1983 and the worldwide trend towards internationalization of financial markets, Australia monetary policy has become increasingly influenced by overseas developments in bond and foreign exchange market. As the inflation rate can be influenced by outcome in the foreign exchange...