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Appendix B —Statement on the conduct of monetary policy
Treasurer and the Governor of the Reserve Bank
This statement records the
common understanding of the Governor, as Chairman of the Reserve Bank Board,
and the Government on key aspects of Australia's monetary and central banking
Since the early 1990s,
inflation targeting has formed the basis of Australia's monetary policy
framework. Since 1996, this framework has been formalised in a Statement on the
Conduct of Monetary Policy. The inflation targeting framework has served
Australia well and is reaffirmed in the current statement.
This statement should
continue to foster a better understanding, both in Australia and overseas, of
the nature of the relationship between the Reserve Bank and the Government, the
objectives of monetary policy, the mechanisms for ensuring transparency and accountability
in the way policy is conducted, and the independence of the Reserve Bank.
This statement also records
our common understanding of the Reserve Bank's longstanding responsibility for
financial system stability.
Relationship between the
Reserve Bank and the Government
The Reserve Bank Act 1959
(the Act) gives the Reserve Bank Board the power to determine the Reserve
Bank's monetary policy and take the necessary action to implement policy
changes. The Act nominates the Governor as Chairman of the Reserve Bank Board.
The Government recognises
the independence of the Reserve Bank and its responsibility for monetary policy
matters and will continue to respect the Reserve Bank's independence as
provided by statute.
New appointments to the
Reserve Bank Board will be made by the Treasurer from a register of eminent
candidates of the highest integrity maintained by the Secretary to the Treasury
and the Governor. This procedure removes the potential for political
considerations in the appointment process and ensures only the best qualified
candidates are appointed to the Reserve Bank Board.
Section 11 of the Act
prescribes procedures for the resolution of policy differences between the
Reserve Bank Board and the Government. The procedures, in effect, allow the
Government to determine policy in the event of a material difference; but the
procedures are politically demanding and their nature reinforces the Reserve
Bank's independence in the conduct of monetary policy. Safeguards like this
ensure that monetary policy is subject to the checks and balances inherent and
necessary in a democratic system.
In addressing the Reserve
Bank's responsibility for monetary policy, the Act provides that the Reserve
Bank Board shall, from time to time, inform the Government of the Reserve
Bank's policy. Such arrangements are a common and valuable feature of
institutional systems in other countries with independent central banks and
recognise the importance of macroeconomic policy co-ordination.
Consistent with its
responsibilities for economic policy as a whole, the Government reserves the
right to comment on monetary policy from time to time.
Objectives of Monetary
The goals of monetary
policy are set out in the Act, which requires the Reserve Bank Board to conduct
monetary policy in a way that, in the Reserve Bank Board's opinion, will best
- the stability of the currency
- the maintenance of full
employment in Australia; and
- the economic prosperity and
welfare of the people of Australia.
The first two objectives
lead to the third, and ultimate, objective of monetary policy and indeed of
economic policy as a whole. These objectives allow the Reserve Bank Board to
focus on price (currency) stability while taking account of the implications of
monetary policy for activity and, therefore, employment in the short term.
Price stability is a crucial precondition for sustained growth in economic
activity and employment.
Both the Reserve Bank and
the Government agree on the importance of low inflation and low inflation
expectations. These assist businesses in making sound investment decisions,
underpin the creation of jobs, protect the savings of Australians and preserve
the value of the currency.
In pursuing the goal of
medium-term price stability, both the Reserve Bank and the Government agree on
the objective of keeping consumer price inflation between 2 and 3 per cent, on
average, over the cycle. This formulation allows for the natural short-run
variation in inflation over the cycle while preserving a clearly identifiable
performance benchmark over time.
Since the adoption of
inflation targeting in the early 1990s, inflation has averaged around the
midpoint of the inflation target band. The Governor takes this opportunity to
express his continuing commitment to the inflation objective, consistent with
his duties under the Act. For its part the Government indicates that it
endorses the inflation objective and emphasises the role that disciplined
fiscal policy must play in achieving such an outcome.
Monetary policy needs to be
conducted in an open and forward-looking way. A forward-looking focus is
essential as policy adjustments affect activity and inflation with a lag and
because of the crucial role of inflation expectations in shaping actual
inflation outcomes. In addition, with a clearly defined inflation objective, it
is important that the Reserve Bank continues to report on how it sees
developments in the economy, currently and in prospect, affecting expected inflation
outcomes. These considerations point to the need for effective transparency and
The Reserve Bank takes a
number of steps to ensure the conduct of monetary policy is transparent. The
Governor issues a statement immediately after each meeting of the Board,
announcing and explaining the Board's monetary policy decision, and minutes of
each meeting are issued two weeks later providing background to the Board's
deliberations. The Reserve Bank's public commentary on the economic outlook and
issues bearing on monetary policy settings, through public addresses and its
quarterly Statement on
Monetary Policy and Bulletin,
have been crucial in promoting increased understanding of the conduct of
monetary policy. The Reserve Bank will continue to promote public understanding
in this way.
The Governor has also
indicated that he plans to continue the practice of making himself available to
report on the conduct of monetary policy twice a year to the House of
Representatives Standing Committee on Economics.
Treasurer expresses support for the continuation of these arrangements, through
which the transparency and accountability of the Reserve Bank's conduct of
monetary policy are in line with international best practice. These
arrangements enhance the public's confidence in the independence and integrity
of the monetary policy process.
The stability of the
financial system is critical to a stable macroeconomic environment. Financial
stability is a longstanding responsibility of the Reserve Bank and its Board,
and was reconfirmed at the time of significant changes made to Australia's
financial regulatory structure in July 1998. These changes included the
transfer of responsibility for the supervision of banks to a new integrated
regulator, the Australian Prudential Regulation Authority (APRA), and the
establishment of the Payments System Board within the Reserve Bank.
The Reserve Bank Board
oversees the Bank's work on financial system stability. Without compromising
the price stability objective, the Reserve Bank seeks to use its powers where
appropriate to promote the stability of the Australian financial system. It
does this in several ways, including through its central position in the
financial system and its role in managing and providing liquidity to the
system, and through its chairmanship of the Council of Financial Regulators,
comprising the Reserve Bank, APRA, the Australian Securities and Investments
Commission and Treasury. In addition, the Payments System Board has explicit
regulatory authority for payments system stability. In fulfilling these
obligations, the Reserve Bank will continue to publish its analysis of
financial stability matters through its half-yearly Financial Stability Review and will be
available to report as appropriate to relevant Parliamentary committees.
The Reserve Bank's mandate
to uphold financial stability does not equate to a guarantee of solvency for
financial institutions, and the Bank does not see its balance sheet as being
available to support insolvent institutions. However, the Reserve Bank's
central position in the financial system, and its position as the ultimate
provider of liquidity to the system, gives it a key role in financial crisis
management. In fulfilling this role, the Reserve Bank will continue to
co-ordinate closely with the Government and with the other Council agencies.
The Treasurer expresses
support for these arrangements, which served Australia well during the recent
international crisis period.
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