Appendix B — Fourth statement on the conduct of monetary policy
Treasurer and the Governor of the Reserve Bank
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 policy framework.
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.
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.
statement also records our common understanding of the Reserve Bank's
longstanding responsibility for financial system stability.
between the Reserve Bank and the Government
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.
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.
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.
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.
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
with its responsibilities for economic policy as a whole, the Government
reserves the right to comment on monetary policy from time to time.
of Monetary Policy
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 contribute to:
stability of the currency of Australia;
maintenance of full employment in Australia; and
- the economic
prosperity and welfare of the people of Australia.
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.
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.
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.
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.
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 accountability arrangements.
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.
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.
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
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
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
Treasurer expresses support for these arrangements, which served Australia well
during the recent international crisis period.