05 - Monetary Policy

Implementation
The RBA formulates and implements monetary policy.
– Conducted in a transparent manner to reduce uncertainty.

The main goal of monetary policy has been revised to focus on inflation.
– Inflation targets of 2–3 per cent, on average, over the medium term.

At this target range:

– Inflation preserves the value of money.
– Encourages strong and sustainable growth in the economy over the longer term.

According to Reserve Bank Act 0f 1959, Australian monetary policy has 3 objectives
i. Stability of Australian currency
ii. Full employment of the labour force
iii. Economic prosperity & welfare for the people of Australia

Cash Rate

Monetary policy decisions involve setting the cash rate

– Cash rate is the interest rate on unsecured loans overnight loans between banks.

The cash rate cannot be changed by transactions between financial institutions.

Only transfers between the RBA and a bank can affect the cash rate.
– A change in the cash rate indirectly influences the term structure of interest rates in the
whole economy.

Q
Assume there are 4 major banks A, B, C & D in the Australian banking system. They maintain their ESA
accounts wit RBA . Assume the following transactions have been taken place within the day,

Bank D has to pay $80 to bank B & $100 bank A to bank B, Bank C should pay $200 to bank A, and Bank B
should pay $70 to bank C.

*show the ESA accounts