The Reserve Bank ofAustraliaworks to sustain a strong financial system, conducts monetary policy and issues the nation’s banknotes. Its duty is to contribute to full employment, uphold price stability and the financial wealth and wellbeing of the Australian people. By toiling to preserve a strong financial system and effective payments scheme, and setting the cash rate to meet a medium-term inflation target, it achieves these goals. The Reserve Bank started operations asAustralia’s central bank on14 January 1960, after the Reserve Bank Act 1959 replaced the Commonwealth Bank, which had performed the role of central bank since 1911.
The setting of monetary policy is extremely important, since it determines the economic status of each Australian resident. Monetary policy establishes the general level of interest rates in the economy, the price of goods, services and assets and the amount of money in circulation. Put bluntly, the Reserve Bank tries to “fix” the price of money in the economy. Every month the Reserve bank comes up with a ‘target cash rate’ and every day it changes the cash amounts available to banks so that the actual cash rate comes as close as possible to target.
The Reserve Bank consists of two boards: a Payments System Board governing the bank’s payment system policy and the Reserve Bank Board governing all other banking and monetary policies. Both boards are made of members of the Treasury, the bank, leaders of institutions that form part of the economy and other Australian government agencies. This structure has remained constant since 1951, when the Commonwealth Bank was still in existence.
Several overseas central banks, official Australian institutions, the Australian Government and its agencies use the banking services provided by the Reserve Bank. The bank also supervisesAustralia’s gold and foreign exchange reserves. The responsibilities of the Reserve Bank are underpinned by diverse pieces of legislation. The board’s duties regarding monetary policy are laid out in Sections 10(2) and 11(1) of the Reserve Bank Act 1959.
Like most other central banks, the Reserve Bank is responsible for setting interest rates in order to encourage economic growth. For example, in July 2012 the bank decided to keep the rate steady at 3.5 percent after cutting it by a half percent in May and quarter of a percent in June. Reserve Bank Governor Glenn Stevens defended the decision in a statement, saying that the Australian economy had grown more quickly than expected in the two quarters preceding the announcement. The rate cuts in the previous months were made amid growing fears of a global recession.
Rate cuts by the central bank are not necessarily passed on to ordinary consumers. In May only three out ofAustralia’s 120 lenders passed on the full half percent reduction to borrowers. The four largest banks gave their borrowers an average of 0.37 percent relief, blaming rising costs of funding for holding back on the full discount. The same four banks took, on average, 12 days to pass the rate cuts on to home loan consumers, making a collective $133 million profit on the delay.
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