Reserve Bank Interest Rates: Understanding Monetary Policy
Posted February 1st, 2010 and last modified May 12th, 2011
The Reserve Bank of Australia sets monetary policy to strengthen the economy and improve the value of the Australian dollar.
Understanding monetary policy can be difficult to say the least. The Reserve Bank of Australia sets these rates as a way of managing the value of currency and maintaining economic standards. They make changes to the interest rates as necessary to get the target cash result.
Setting monetary policy is the job of the Reserve Bank of Australia. It is here that they decide on the interest rates of overnight loans in the money market. These interest rates influence other interest rates and the economy in general by influencing the behavior of both lenders and borrowers. The Reserve Bank Board sets these rates in order to reach objectives that were set forth with the Reserve Bank Act of 1959. The objectives are to provide stability to Australian currency, to maintain full employment here and to ensure economic prosperity and welfare for the people of Australia.
The board meets on the first Tuesday of each month except January, for a total of eleven times per year. They examine developments in Australian and worldwide economic and look at developments in both domestic and international markets. RBA interest rates are determined through the information that is presented here and then announced to the public before the meeting adjourns.
Reserve Bank Interest Rates day to day job is to keep the money market conditions set in a way that allows the cash rate to stay near the operating target that the board previously set. By setting the cash rate on those overnight loans, which are loans between financial institutions they are able to maintain also the rates in the money market. If they change the monetary policy it also means the operating target for the cash rate changes. This change can shift the interest rate structure in the entire financial system.
When the Reserve Bank Board makes a decision it announces them in a media release which is then distributed to electronic new services. It is also posted on the Reserve bank’s website by 2:30 on the of the board meeting. If they make changes to the Reserve Bank interest rates those changes go into effect the next day.
By adjusting the overnight loan Reserve Bank interest rates they control the supply of finds that are available in the money market. The cash rate in the money market is decided by supply and demand for those overnight funds. If there are more exchange settlement funds then banks want to hold they try to get rid of them by lending more in the cash market. This causes cash rates to fall. If there are less supplied then the banks want to hold they try to borrow more in the cash market in order to build up their exchange settlement funds which causes the cash rate to bid up.
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