Glossary: The Reserve Bank of Australia

The Reserve Bank of Australia (RBA) is Australia's central bank. Governed by the 1959 Reserve Bank Act its chief responsibility through its governing Board is to set interest rates to meet an inflation target.

Functions

The RBA has two main policy functions - it sets monetary policy to meet an inflation target, and is responsible for the stability of the financial system. It also prints and issues banknotes, acts as a banker to the government, and owns Australia's gold and foreign-exchange reserves.

Structure and Personnel

The Board of the RBA is the key monetary-policy making body. At present it has nine members, out of a maximum of eleven. The bank's governor, his two deputies, and the secretary to the Treasury are always members. Currently they are Ian MacFarlane, Stephen Grenville and Graeme Thompson, and Edward Evans.

Monetary policy

The 1959 Reserve Bank Act gives the RBA three goals for monetary policy: the stability of the currency; the maintenance of full employment; and the economic prosperity and welfare of the people.

This is now interpreted as maintaining a stable and low inflation rate. The centre-piece of this policy is an inflation target of an annual rate between 2% and 3% cent on average over the medium-term, agreed by the RBA and the government.

In theory the RBA is not as independent as many central banks, as it must consult the government before taking monetary policy decisions, and the government can overrule the bank's recommendations. However, in practice no such confrontation has ever taken place and if the government wants to override the bank it must take its case to both houses of parliament for approval.

Exchange-rate policy

The government sets an exchange-rate policy for the RBA to implement. Currently, the Australian dollar floats against other currencies. However the RBA does intervene in the forex markets -- buying and selling the dollar to alter its value -- to smooth exchange-rate movements.

Instruments and interest rates

The bank's main instrument of monetary policy is the overnight cash rate. Since 1990, its policy on rate changes has been to make a public announcement, usually at 09:30 Sydney time, stating that it wants the cash rate to rise or fall and explaining why. Its board meets on the first Tuesday of every month, but any decision to change rates is usually implemented some time later.

The bank carries out daily open-market operations, involving repos or outright sales or purchases of federal government securities. It also offers to buy back notes with less than 90 days left to maturity, but this discount rate carries a penalty margin and is rarely used.