How the Reserve Bank of Australia Manages Money to Help Business Growth
Countries ranked as the top economies have a common feature – a healthy, conducive business environment that encourages growth, innovation, and development. A country’s financial and economic policies contribute significantly to the performance of businesses and their economic strength.
Reserve Bank of Australia (RBA) is Australia’s apex bank responsible for monetary policies impacting the economy and those involved in activities such as trading forex, investments, and other businesses.
In this article, you’ll learn how the RBA manages money and the economy to create a conducive environment where businesses can thrive.
RBA Monetary Policy
The RBA Monetary Policy is one of the main economic policies of Australia and is focused on adjusting interest rates to promote stability, lower the inflation rate, and increase the demand for the Australian Dollar.
The RBA achieved this by targeting inflation between 2-3%, on average, over time. The cash rate is the primary tool used to manage inflation.
The RBA has, at times, also used other tools, including targeting 2-3% longer-term interest rates and buying and selling government bonds.
Adjusting supply of money
The total supply of a country’s currency and the circulating supply are two important factors contributing to the economy’s stability and inflation. If most of the country’s circulating currency is held outside the confines of the central bank, it may be difficult to keep inflation within desirable limits.
There are several ways through which the RBA adjusts the supply of money, but the two most common are buying and selling securities in the open market. This is called Open Market Operations in many countries.
The RBA performs open market operations to either increase or decrease the money supply by buying or selling securities respectively. These actions have short-term and longer-term economic impacts, typically beginning with lower interest rates, more loans, and a stronger foreign currency exchange rate.
Other impacts include improving the employment rate, lowering the cost of goods, and promoting international trade. The RBA also impacts other markets, such as the Asian markets.
Adjusting the reserve requirements
Another way the RBA controls monetary supply is to increase or lower the reserve requirements for banks.
The reserve requirement refers to the minimum cash amounts that banks must have in their vaults or at the closest RBA branch, corresponding with the deposits within a specified period.
The RBA can influence the loan interest rate and cash supply by increasing or lowering this reserve requirement. How does this work?
When banks receive cash deposits, they keep a certain percentage with the RBA or in their vaults and pay other customers who come to withdraw or get cash loans. But that percentage is decided by the RBA. So, an increase in the minimum percentage of funds (the reserve requirement) will cause the bank to keep more money, thereby lowering the amount accessible for loans or withdrawals, leading to a lower cash supply.
This method is effective for creating artificial demand and supply of the AUD.
Australia’s interest (cash) rate is currently at 3.60%, as set by the RBA. This was after its previous rate increased by 25 basis points on February 7, 2023, to hit a new decade high of 3.35%. The RBA defended its action as it battles tough economic conditions.
The RBA governor, Philip Lowe, insisted that the rate may increase in the coming months. The interest rate affects the economy generally:
One of the effects is seen in the housing industry, where mortgages are increasing. Mortgages may now have an increase of up to AUD77 on monthly payments for mortgages over AUD500,000.
The RBA may implement certain interventions if some detrimental economic events occur. For example, the stock market crash or mortgage-backed assets industry may see the RBA buy back some assets to mitigate the effects of the crash.
A steep drop in the value of the AUD might also prompt an intervention such as the creation of artificial demand.
Creating artificial demand for the AUD
Another important method that the RBA might resort to is creating artificial demand for the AUD. This is achieved through buying the AUD (the local currency) using a percentage of its foreign reserves. This move creates an artificial demand for the currency, stoking investors’ confidence and appetite. Increased demand is then met with a controlled supply to keep the exchange rate healthy. Although this can happen, the RBA does not implement it as a first line of action.
The RBA as a regulatory body
At its core, the RBA follows its mandate on its website: “The RBA is responsible for promoting overall financial system stability. It does this by managing and providing liquidity to institutions, regulating the payments system (including financial market infrastructures) and monitoring risks in the financial system.”
In addition to that, the RBA functions as one of Australia’s financial regulators under The Council of Financial Regulators (CFR), the coordinating body for Australia’s main financial regulatory agencies. It includes the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and the Australian Treasury.
The governor of the RBA chairs the CFR and oversees its activities, guiding businesses, the government, and institutions.
The Reserve Bank of Australia is tasked with monetary policy and control to provide a healthy environment for businesses. Keeping a strong exchange rate is crucial for forex traders and local and international companies doing business in Australia.
Australia remains one of the best places to do business today, with strong policies implemented to help business growth.