Understanding Australian Monetary Policy

February 23, 2019 03:00 PM PST | By Team Kalkine Media
 Understanding Australian Monetary Policy

Monetary Policy defines the strategic principles adopted by the central bank to manage the liquidity across the nation. The key objective of Monetary Policy adopted by nation’s central bank is to keep a close eye on inflation, unemployment and cash position in the market and then carry out adjustments to ensure the economic growth of the country.

Australian Monetary Policy is formulated by apex bank that is Reserve Bank of Australia (RBA). It is a central bank of Australia that is responsible for setting the country’s official interest rate, called cash rate.

While setting monetary policy, RBA’s decisions are driven by three major targets that include the stabilization of the Australian Dollar, the maintenance of full employment in Australia and the economic welfare of Aussies. Further, the Reserve Bank uses an inflation targeting framework to guide its monetary policy decision making.

A relationship between interest rate and inflation:

There is always an inverse relationship between the interest rate and inflation. If the country’s economy gets hit by inflation thereby ruining the value of the currency, the central bank will introduce tight monetary policy by raising the interest rate. In Australia, the official interest rate is called the cash rate at which RBA lends overnight money to commercial banks.

The cash rate influences other interest rates in the economy like interest rates for business loans, housing loans and interest rates on savings accounts. Boosting the cash rate directly impacts the domestic money market as the money supply in the market will get hindered due to expensive loans. That means now if one wants to borrow money for scalability in business, to buy property, or for other purposes, they will have to pay an increased amount of interest. The reduced liquidity will slash down people purchasing power, resulting in the downward shift in demand which means softening of prices and inflation getting back on track!

On the other hand, when the bank decides to inject money in the market, it announces interest rate cuts to fuel up corporate operations targeted at the overall economic growth of the nation. However, saving money in the bank with lower interest is the less preferred option for people which eventually results into the inflow of money in the market. In this manner, monetary policy also provides a stable financial system at the time of disruptive events or the softening of the economy.

RBA’s policy objective involves maintaining average CPI within the range of 2 to 3 % in near term. Whereas, Australia’s cash rate has been kept unchanged to 1.5% as at 4 February 2019.

Formulation of Monetary Policy:

The Reserve Bank is an autonomous body that takes decision independent of the government. It ensures the prevention of monetary policy manipulation for political purposes. Australia’s Monetary Policy is formulated by the Board of Reserve Bank of Australia (RBA) which comprises of total nine members including Governor and Deputy Governor. The decision of monetary policy is formed by a majority vote in the meeting held on the first Tuesday of every month.


Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.


Disclaimer

The content, including but not limited to any articles, news, quotes, information, data, text, reports, ratings, opinions, images, photos, graphics, graphs, charts, animations and video (Content) is a service of Kalkine Media LLC (Kalkine Media, we or us) and is available for personal and non-commercial use only. The principal purpose of the Content is to educate and inform. The Content does not contain or imply any recommendation or opinion intended to influence your financial decisions and must not be relied upon by you as such. Some of the Content on this website may be sponsored/non-sponsored, as applicable, but is NOT a solicitation or recommendation to buy, sell or hold the stocks of the company(s) or engage in any investment activity under discussion. Kalkine Media is neither licensed nor qualified to provide investment advice through this platform. Users should make their own enquiries about any investments and Kalkine Media strongly suggests the users to seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice), as necessary. Kalkine Media hereby disclaims any and all the liabilities to any user for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising from any use of the Content on this website, which is provided without warranties. The views expressed in the Content by the guests, if any, are their own and do not necessarily represent the views or opinions of Kalkine Media. Some of the images/music that may be used on this website are copyright to their respective owner(s). Kalkine Media does not claim ownership of any of the pictures/music displayed/used on this website unless stated otherwise. The images/music that may be used on this website are taken from various sources on the internet, including paid subscriptions or are believed to be in public domain. We have used reasonable efforts to accredit the source (public domain/CC0 status) to where it was found and indicated it, as necessary.


Sponsored Articles


Investing Ideas

Previous Next