Australia: Monetary & Fiscal Policy.

The Reserve Bank of Australia (RBA) is the main governing body of Australia when it comes to monetary and fiscal policy.

The RBA’s aim is three-fold:

1. Keep exchange rates stable
2. Ensure growth
3. Maintain full employment

In order to do this, the bank believes that the country’s annual inflation rate must be kept within 2-3%.

By keeping a tight rein on inflation, the value of their domestic currency is secured, which will eventually lead to sustainable economic growth.

How does the RBA make sure inflation is controlled?

Two ways: adjusting the cash rate and conducting open market operations.

The cash rate is the interest rate charged by lending banks on overnight loans to other financial institutions.

Open market operations, on the other hand, is the way the RBA controls the money supply through the buying and selling of government loans or other financial assets.

With the exception of January, the RBA meets monthly to discuss what changes it will make to monetary policy.

Example.

To make this easier to swallow, take this simple example.

Let’s say that inflation in Australia is increasing much faster than what the bank wants.

In order to suppress the high inflation rate, the bank decides to raise the cash rate, which will effectively increase the cost of borrowing by…. uh, borrowers.

Naturally, this move will tone down lending, lessening the overall money in circulation.

And basic supply and demand tell us that the scarcer something is, the more valuable it is!

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