Videos Functions and Activities

Transcript

Philip Lowe, Governor

The Parliament of Australia has given the Reserve Bank some incredibly important responsibilities. The one the community's most familiar with is that the first Tuesday of every month except for January, the Reserve Bank Board meets to set the cash rate. The cash rate's very important because it influences the cost of people's mortgages, the rate of return they get on their savings. It influences the exchange rate and the value of people's assets. So the community has a lot of interest in those decisions.

The Reserve Bank also produces and distributes Australia's banknotes. We have some of the best quality banknotes in the world. We've got fantastic technology. We were the first country to introduce the polymer banknotes. We were also one of the first countries to have a man and a woman on every single banknote which I'm particularly proud of. The banknotes are produced in a purpose built facility down on the outer suburbs of Melbourne. We've got a huge vault there which we store and distribute banknotes from. It might come as a surprise to many people that despite the use of, increase in use of electronic payments, the value of bank notes on issue is at a record high. So many people are holding our banknotes as a store of value.

The Reserve Bank is also the banker for the Australian Government. So when you get a Medicare refund or if you're lucky enough to get a tax refund. Or when you have to pay your tax, those transactions occur through the government's bank accounts at the Reserve Bank. So, we manage all the government's payments whether it's for defence purposes or social security. So we're a very large transactional banker in our own right.

The Reserve Bank also operates the core of Australia's payment system. When money goes from one bank to another, perhaps because you are paying a bill to somebody who banks with a different bank. The money finds its way from your bank to the other bank through the Reserve Bank. So, it's a really central part of Australia's payment system.

The Reserve Bank has also developed with the banks, the New Payments Platform. Which allows people to make payments 24 hours a day, 7 days a week using just a mobile phone number or an email address. So, you don't need to know a BSB or account number anymore. The Reserve Bank encouraged the financial institutions to develop this new system and then we built a core part of the infrastructure that allows the money to move from one bank to another.

The Reserve Bank is also responsible for the stability of the financial system. We do this in a number of ways. We operate in the financial markets every day to keep the liquidity of the system stable. In extremes we can operate as the lender-of-last-resort providing liquidity of solvent but troubled institutions. We also work with the other regulators APRA and ASIC, through the Council of Financial Regulators to identify risks in the financial system. And develop plans when we see the risks developing. And we put out public analysis and research on financial stability issues on a regular basis.

The Reserve Bank also manages Australia's foreign exchange reserves, which is very important. We represent Australia in many international forums, the G20, the Bank for International Settlements, and the International Monetary Fund. We're bringing Australia's particular perspective to international audiences. Which in many cases is very important and it's often highly valued. We do all this with 1,300 people. Most of us are located here in the head office in Sydney. But we have offices in Brisbane, in Melbourne, in Adelaide, in Perth. And we also have offices in Beijing, London and New York.

Transcript

Philip Lowe, Governor

The Reserve Bank's Charter was written in 1959. It's broader than the charter of most other central banks, it's got three key elements. The Reserve Bank is responsible for low and stable inflation, for full employment, and promoting the general welfare of the Australian people. I'm glad we've got this broad mandate, it's, as I said, it's broader than most other central banks, many other central banks just have a mandate to control inflation. In the end, low inflation is not the goal in and of itself, it's delivering low inflation to promote the economic prosperity of the Australian people.

The Reserve Bank Board sets the cash rate on the first Tuesday of every month. The cash rate is the rate that banks use to lend to one another in a short-term money market, but it has a very large effect on mortgage rates in the economy, on the rates that people get on their savings, and affects asset prices and the exchange rate, so it's a very important interest rate.

Sometimes, we need to raise interest rates to achieve those objectives. If the economy's growing very strongly, demand's very buoyant and that's pushing up prices, we might need to raise interest rates to slow the economy, to get things back onto an even keel. Conversely if things are weak and demand is not very strong and inflation's low, we might need to lower interest rates to stimulate demand and get inflation back up towards the target.

When we change interest rates, people obviously notice in their mortgages, and that affects how much they spend. When rates are going up, they have less to spend, and when rates are going down they have more to spend. Changes in the cash rate also affect the exchange rate. If we raise interest rates, the currency tends to appreciate, and when we lower interest rates the currency tends to depreciate. Changes in interest rates can also affect people's confidence. In some circumstances, lower interest rates makes people feel happier, in other cases it, higher interest rates make people feel less happy, and so that affects their spending. Changes in interest rates also affect asset prices. When we have lower interest rates, that tends to push up asset prices, and if asset prices are higher, people might feel wealthier, and if they're wealthier, they might spend more, and conversely, if higher rates might mean lower asset prices, then people don't feel as confident and they don't spend as much.

Our Board is made up of mainly outside people, who are either business people or people who have experience in other areas of public policy or public service. And I think that's really valuable. What I notice about business people and people who have the broader experience is they're very good at making decisions under uncertainty, and much of what the Reserve Bank Board is doing is making a very important decision in a quite uncertain world, so we're trading off things all the time and we're trying to make the best decision in the welfare of, best welfare of the people of Australia. And the business people and people with outside expertise are very good at doing that. Daresay they're actually better doing it than economists, so I like, kind of having this broad perspective on our Board, I think it also helps the legitimacy and the public accountability of the Board, it's much better to have the interest rate decisions made by this broad group of people rather than primarily made by technical, academic economists. So I'm a strong fan of our current board structure, although it's quite different from the boards of most other central banks.

At a very practical level, we operate a flexible medium-term inflation target. Our objective is to deliver an average rate of inflation for the community between two and three percent, over time. We're prepared to allow the inflation rate to move up and down over time, but we want people to be confident that over time, inflation in Australia will be two point something. And if people are confident of that they can go about making their decisions about saving, investment and spending, with assurance that inflation will be low and stable, the value of their money will be protected because it won't be eroded by inflation, then they can have certainty about what the price level will do over time.

Transcript

Guy Debelle, Former Assistant Governor (Financial Markets)

The Bank has two roles: it operates in the domestic market and it operates in international markets. The Reserve Bank Board sets a target for the cash rate at its monthly meetings and it's the job of the domestic operations to make sure that target is actually achieved. It does that by adjusting the supply of funds in the interbank market, so that the banks have an incentive to lend their money between themselves at the cash rate. So we control the supply; they have the demand, and the net outcome of that is the price.

To adjust the supply of liquidity in the market, the Bank operates in the market by either buying or selling securities, which is the stuff you read in textbooks. But mostly what we do is actually something called a repo, which is we lend or borrow money from the banking system against collateral (normally a government security), but also bank paper as well. So we inject money into the system by lending to a bank and, in return, they provide us with a security.

We operate in the market every day. We do it at 9.45 in the morning, so at 9.30 am we publish on the news services what our intention is that day: we tell them how much liquidity we're going to inject, what we intend to inject into the market, and at what term we're going to do.^[*] So we don't lend overnight generally – almost never. We lend for a period of time – a month or two. The banks, or any other participant, can ring us back with their bids by 9.45 am each day. It's an auction, so whoever gives, or offers us the best price, is the one we accept. Normally we accept multiple bids and we also do, since last November, a second round of open market operations, potentially each day at around 5.10 pm in the day, about one in every two or three days. With the move to fast settlements now, there is a requirement that the liquidity position in the market at the end of the day is right where we want it to be.

It's because we operate in the market every day that we get to assess the demand of counterparties for liquidity. As I said, we control the supply, they have the demand, and we can see how much they're demanding. If they're demanding more, we can increase the supply to make sure that the price, which is the cash rate, stays where the Board wants it to be. But also because we're interacting with market participants every day in doing these transactions, it gives us a lot of insight into the conditions in the market because we're actually a participant in the market ourselves.

Transcript

Guy Debelle, Former Assistant Governor (Financial Markets)

The Bank has two roles: it operates in the domestic market and it operates in international markets.

The Bank owns the country's foreign exchange reserves, they are actually on our balance sheet, and we manage them on behalf of the country.

We operate in the foreign exchange market for two reasons. One is to give us the capacity to intervene in the market when conditions require. So, for instance, in 08/09 conditions in the foreign exchange market here and globally deteriorated; liquidity was very sparse and we stepped in to provide liquidity into that market. The intervention episodes are generally fairly few and far between. We haven't intervened or felt the need to intervene in the market since 08/09.

We also operate in the FX market every day of the week, because we do the Government's foreign exchange transactions for them. So every day, if the Government needs to pay some bill in foreign exchange, we'll provide money to an embassy offshore. We provide that money to the Government out of the foreign exchange reserves. We then go back into the market and replenish the foreign exchange reserves back to where we want them to be.

So the idea in managing the reserves is that we hold reserves to have sufficient liquidity for us to be able to intervene in the market when we need to. Normally we're not going to get a lot of advance notice of that, so the reserves have to have a certain degree of liquidity. Besides that, we aim for a diversity across the portfolio and that the portfolio has only the highest credit.

We hold roughly half of the portfolio in US dollars, about 30 per cent in Euro and then some in Japanese Yen, the Canadian dollar and the RMB, which we've only started investing in relatively recently.

We have a global operation. All our domestic operations are done out of the Sydney office, but we have offices in New York and London to manage the foreign exchange reserves portfolio. So the US dollar and the Canadian dollar portfolio are managed out of New York, the Euro portfolio is managed out of London, and then the Yen and RMB portfolio and the oversight of the portfolio as a whole is done out of Sydney.

So just like in the domestic market, we're transacting in those global markets every day. For instance, we hold about half of our portfolio as I said in US dollars; most of them are in US Treasuries, so we're dealing in the US Treasury market every day which gives us direct insight as to how the market is functioning. Similarly, in the FX market, because we're transacting in the market every day of the week, that gives us a good insight into how conditions are unfolding in that market.

Transcript

Luci Ellis, Former Head of Financial Stability; Now Assistant Governor (Economic)

Financial stability matters because if we don’t have it, the economic and social cost can be huge. The human cost of financial crises is enormous, as we've seen in a whole lot of countries over recent years. People lose their jobs, businesses fail, people lose their life savings – it's a real economic cost, not just about the financial sector.

There are a lot of ways we can help promote financial stability. There are things we can do in terms warning about risks. There are things we can do working with the other regulators in Australia to push against the kind of risk-taking that could cause a problem later on. We can advise government about possible policies across the regulatory and tax and all the other areas that the government can respond to. We can work with international regulators to help build global rules for banks, for insurance companies and other parts of the financial sector to make the financial system resilient to things that could happen to it from outside the financial system and also to work against the financial system creating risks within themselves that could hurt the real economy.

The Reserve Bank isn’t the regulator of the banks or insurance companies or the other parts of the financial system. We have some specific powers to regulate certain kinds of financial infrastructure, the platforms that people use to trade money amongst themselves and to settle their debts, but we’re not the regulator of the banks, that's APRA. What we can do though is work closely with APRA. I like to see the team in Financial Stability Department as being the economists on tap for APRA. We’re there to analyse the risks, to surveil everything that's happening in the financial system and also in the customers of the financial system, the households and businesses – whose financial activity could expose them to risks that they perhaps might not fully understand or appreciate or for which they might be accepting quite low compensation. And all of those things are things we would be looking for and working with APRA in terms of formulating policies that might be helpful in leaning against those risks.

We also do a lot of communication. I like to say that we have a telephone and a microphone, the telephone's for calling APRA or calling ASIC, the microphone is for speaking to the general public and to the banks and to other people who need to be informed about the risks that might be building up and that perhaps they may want to do something about and respond to.

The Bank also has an important role in crisis management. We have to respond if financial instability does occur. Again all of the regulators in Australia get involved in their various responsibilities, in terms of responding and mitigating some of the consequences. Among the Bank's responsibilities would be to provide liquidity to the financial system. The Reserve Bank is the provider of cash and liquid assets and so if there are institutions that have good assets but they just would not get a good price if they had to sell them today, they can instead present them to the Reserve Bank and get cash, get money in their account with the Reserve Bank and be made liquid again. That's a very important role of central banks and has been for many centuries.

The Bank has to work very closely with regulators, other regulators both in Australia and overseas. In Australia there is the Council of Financial Regulators, which includes ASIC and APRA as well as Treasury, and the Governor of the Reserve Bank chairs that group. And that's where the Australian regulators work together to formulate crisis management policy, to help advise government about issues to do with financial stability and financial regulation. And it's where we can nut out our joint position so that all the policies that are implemented in the Australian financial sector are well thought through and take all of the different sectors in the financial system into account.

Internationally we also do a lot of engagement, a lot of meetings, we spend a lot of time in planes going to those meetings and there's an array of different international organisations that the Reserve Bank participates in. These are all international agencies where various countries come together and formulate common rules because things that go wrong in one country, as we’ve seen in recent years, can really harm the economies and the financial systems of other countries that are in many ways innocent bystanders. So we all have to work together to ensure high standards of regulation and supervision in the financial system. We all have to work together to detect the risk that might be building up that could affect each other.

It really matters to the Australian people if something goes wrong abroad because of what that can do to the world economy and therefore affect Australia.

Transcript

Tony Richards, Former Head of Payments Policy

The Bank has got a number of roles in payments systems. One important one is that we operate the system that banks use to transfer funds between themselves – and there's very high values going through that obviously, something like $180 billion a day on average through that system. And the other important one that I'd like to talk about is the Bank's role as regulator of the payments system, and that's done by the Payments System Board. The Bank has two Boards, there's the Reserve Bank Board and the Payments System Board.

The Payments System Board has been given the responsibility for competition and efficiency of the payments system and also for controlling risk and promoting the overall stability of the financial system.

Our work on retail payments emerged from the Wallis Inquiry which found that the cost of payments in Australia were quite high and they gave the Bank a mandate to improve the competition and efficiency in the payments system. So our early work was with respect to the payments card systems, where there were a number of fees that weren't particularly transparent. There were also restrictive rules on merchants and so the Bank has put in a series of standards or regulations to improve the competition and efficiency in the card systems.

We've also done some work on the ATM system where the emphasis has been on making the cost of ATM transactions transparent to customers (rather than finding out about the cost of it a month later on their bank statement), and also ensuring that the owners of ATMs are able to charge and continue to provide the services.

The Bank has a responsibility to ensure that licensed clearing and settlement facilities operate in a way that promotes the stability of the Australian financial system. The Bank has put in place standards and it does annual assessments against those standards. What we do is we have ongoing dialogue with the clearing and settlement facilities. We understand their business models, we understand the risks they're taking, the new products they're offering and once a year we do an assessment of those clearing and settlement facilities.

The New Payments Platform is an exciting project that is building a new centralised or hub-based infrastructure that all financial institutions will connect to. And among other things, it's going to facilitate real-time payments between households. So, for example, if I was wanting to sell my car on a Saturday afternoon privately, I'd be able to make sure that the money had arrived in my account from the buyer before I hand over the keys.

So the Bank has been working closely with the industry. It's a collaborative project and the industry participants will also be building their own apps et cetera to offer new and improved payments services to their customers.

Transcript

Michele Bullock, Former Assistant Governor (Currency); Now Deputy Governor

The Reserve Bank actually is responsible for issuing Australian banknotes, but we're also responsible from – all the way from production through to circulation and then withdrawal and ultimate destruction of the banknotes, and the purpose of that is to ensure that the Australian public can be confident in the banknotes and use them in transactions and as a store of value.

It's only been the Reserve Bank's job since earlier in the 1900s. In fact, prior to Federation the commercial banks printed their own banknotes and then eventually that power passed to the Commonwealth and then eventually to the central bank.

Coins actually aren't printed by the Reserve Bank; coins are the responsibility of the Mint which is based in Canberra.

So the first thing about our Australian banknotes is they're plastic and this is quite unusual and it was the first time in the world really that a plastic banknote had been issued, prior to that banknotes were always issued on paper. And that actually is a very important security feature. It does two things. It means it's harder for people to reproduce a banknote on plastic and, in addition, they're much more durable, they last longer in circulation, so that's a really key thing about Australian banknotes.

The design of the banknotes is based on the plastic and it's also got security features in it. The first as I said is plastic, that's a very important thing so it should – if you scrunch it up it should spring back or if you try to tear it, it shouldn't tear easily. But there's also the clear window at the bottom of all the banknotes, and that shouldn't be a stuck on piece of plastic, that should be integral to the banknote.

There's a number of other security features as well. The printing needs to be – you need to see very, very sharp printing and in fact on every banknote there's this little tiny micro printing and if you get a magnifying glass out or if you have really good eyes you might be able to see it, it's very, very precise printing and you can't reproduce that in a counterfeit.

They are quite colourful and that's a very deliberate decision. For people with vision impairments who perhaps don't have very clear vision, the bright colours help them to distinguish between the banknotes. There's a number of other things which help them as well. All the banknotes are a slightly different size, they get longer as they get higher value and they've got big bold numerals on them as well, again to assist people with vision impairment.

There's around about 1.3 billion banknotes in circulation and that in total value is around about $61 billion.

Now counterfeiting isn't a problem in Australia and I think that reflects the fact that we've had such a secure banknote with the plastic banknotes since the mid 1990s so it's a long time. But it isn't a problem. However, we always want to make sure that we're keeping one step ahead of the counterfeiters. Technology these days, the price is coming down, it's getting easier to access this technology and what we want to do is make sure we just stay one step ahead.

So the banknote really is, I've often heard it said, the business card of the country. It's what people see when they come into the country, it's the first thing, so you want something that reflects your cultural heritage or history and in our case what we have on our banknotes from our 10 upwards is we have two people, a male and a female on each side of the banknote and those people have a story behind them, and when you look at the banknote you will see pictures which represent that person's story in our history.

The five dollar is a little different because it has Parliament and the Queen on it, so it more represents democracy, Australia as a democracy.

Transcript

Lindsay Boulton, Former Head of Banking

Many people are aware of the Reserve Bank's role in setting monetary policy, and in particular in the cash rate target announcements that occur every month. What many people aren't aware of, however, is the Bank also provides banking services; it is in actual fact a bank. The Bank's principles customers are other central banks, overseas international organisations such as the Organisation for Economic Cooperation and Development. But our most important banking customer is in fact the Australian government and the various agencies and departments of the government. At a very high level there are two parts to our banking services, our core banking service and our transactional banking service.

Core banking service is a service that's very similar to what we would find if we looked at many other central banks around the world. It is essentially a service whereby the Reserve Bank maintains the government's core set of accounts, this is around half a dozen accounts that the government holds, through which almost all of its payments and receipts flow. Money is moved into, and out of, the core bank accounts on a daily basis and on average each day around three billion flows out and roughly the same amount moves back in again.

It's very important for the government to ensure that the payments that it makes go out on time and that the money that it's expecting to receive comes in on time as well. It's important for those systems to ensure that the movement of funds is just on time, the systems themselves are sophisticated enough to ensure that the government doesn't have idle balances sitting around and that its payments are made just when the government intends to make them.

Transactional banking services is more the kinds of service that you would see in a commercial bank whereby various customers hold accounts and the Bank will facilitate movements in and out of those accounts. So the Reserve Bank provides accounts for various government departments and agencies and will facilitate the process of moving funds in and out of those accounts. The transactional banking service is unique compared to the core banking service in that we are required to compete with the commercial banks to provide that service.

On an annual basis there are around 350 million transactions through our transactional banking service with a total value, over the course of the year, of just under a trillion dollars. The kinds of payments and transactions that occur through the transactional banking services are the ones that many people in the public would probably be aware of. They include pension payments, social security benefits, child support transactions. They go through the Reserve Bank's banking service, and also emergency payments, so in times of natural disasters for example, when the government is keen to ensure that victims of natural disasters have access to funds in order for them to purchase food and other items, emergency payments will flow through the Reserve Bank's transactional banking system.

Transcript

Greg Johnston, Head of Payments Settlements

Payments are often referred to as the plumbing of the economy. When people buy and sell goods and services, a payment usually flows. For more than half of those payments, the buyer and the seller bank with different financial institutions. So when that occurs money needs to flow from one financial institution to another to make the payment successful. In Australia, that occurs across exchange settlement accounts at the Reserve Bank.

Payments Settlements Department's role is running the system that enables that settlement to occur. For high value payments, settlement occurs in real time as they’re exchanged between financial institutions. We do this to eliminate the risk, immediately as those payments are flowing, that relates to the obligation from one financial institution to another.

For low value payments such as those made by cards, direct entry and EFTPOS payments, settlement occurs after the exchange, usually at 9 am the next morning. But for direct entry payments we settle those later on the same day those payments are exchanged.

The system that settles payments in Australia is called the Reserve Bank Information and Transfer System, or RITS. RITS settles around $170 billion high value payments each day, and probably a further $7 billion in low value payments every day. Payments Settlements Department is also responsible for settling transactions that the Reserve Bank initiates, such as it implements open market operations. It also is responsible for settling transactions initiated by overseas central banks that bank with the Reserve Bank here in Australia.

RITS is a critical component of the Australian financial system, it's owned and operated by the Reserve Bank, and we invest very heavily in ensuring that it is stable and reliable and always there to meet the needs of the Australian economy. Supporting innovation is a very key theme for Payment Settlements Department at the moment. The industry is involved in developing a new payments platform. This new platform will enable a new payment to be offered to the Australia community. It will enable a sender to send, in real time, a payment to a beneficiary and have that beneficiary be able to see that payment within seconds of the payment being sent. In addition to that, there will be a good deal of remittance information that will be able to be sent with that payment. If you buy a car on the weekend and it happens to be an expensive car, instead of having to write out a cheque, you might be able to then pull out your mobile phone, send the payment to the car dealer and the car dealer can see straight away that the payment has been made and is therefore happy to give you the keys.

Transcript

Virginia Christie, Former Senior Representative at Reserve Bank of Australia

The Liaison Program is the way in which the Reserve Bank's been able to extend its presence in the Australian community. And so there was a recognition that it was important for the Bank to engage with the business community and to feed messages from the business community into that one very important decision on interest rates. So in 2001 we established state offices in Perth, in Adelaide, in Melbourne, and in Queensland and our Head Office is here in Sydney, and the idea was that by being on the ground we would be able to introduce more concepts and more information about what's happening in the economy and that just helps make better informed decisions on economic policy.

There are a couple of big advantages by having the Liaison Program; firstly the information that we get from the business contacts is highly relevant because decisions that they make today will lead to economic outcomes tomorrow, so you can't get much better than that and secondly it's very timely so it often gives us insights into how the official statistics are going to be playing out. And a good example of this is our retail liaison, so we meet with key firms across the whole of Australia or we speak to them every month and by doing that we're getting an on the ground assessment of not only how they're going but what their future plans are. And this information comes out about two to three weeks before the official statistics are released, so when it comes down to policy you know that's a huge advantage.

The Liaison Program is intended to be as far reaching as possible, so when we select our liaison participants for the program we are trying to ensure that we have a good cross section of contacts who are representative of conditions in their sector or industries, so we don’t necessarily only want to speak to the big firms in the mining sector, but it's important for us to understand what's happening in the tourism sector, education, manufacturing, so we ensure that we have that broad spread. And because we're speaking to large firms it's still important for us to understand what's happening with small businesses. There are too many small businesses for us to meet, so what we do we organise round table discussions with a group of small businesses on a fairly regular basis across the states and also in Head Office Sydney.

Well we're trying to seek firm specific information, and we're wanting not only to understand whether firms are going to be increasing or decreasing investment or wages or the like, we also want an understanding of the reasons why they're doing this because this adds to the richness of the information. And I think a good example of this was during the Global Financial Crisis in 2008, so there was a lot of pessimism around about future prospects for Australia, and rightly so at the time, but when we spoke to our contacts we started to get an understanding that in actual fact the first thing they were going to do wasn't to reduce the number of jobs in their workforces, they wanted to retain flexibility in the workplace and so they reduced hours worked, and they encouraged people to take accumulated leave and the reason they did this was because when growth resumed at whatever point that might have been they didn't want to be in a position where then they had to look for new employees and go through the same problems that they actually did during the boom period. So we wouldn't have had those great insights if it wasn't for the Liaison Program.

The information from the Liaison Program gets used in a variety of ways, it gets incorporated into information that's used in Head Office for the forecasts, but because it's so timely and because it's giving us these very insightful views on how things might be playing out into the future, we have learnt about so many different things in the economy and a good example of this is with the mining investment boom. So we had the privilege of being able to speak to mining firms and mining firms gave us information about their investment plans into the future and when we joined the dots together, we realised that this mining investment boom was going to be much larger in magnitude than what we'd envisaged, and also for that reason for what anyone else was thinking at the time. So this gave the Reserve Bank some time to step back and think about the implications of this mining investment boom on the rest of the economy and what policy responses should or shouldn't be taken as a result of that. So we wouldn't have been able to get those insights if it wasn't for the mining Liaison Program.

Another great example was with the natural disasters, the Queensland floods and cyclones in 2010 and 2011, and so when it came to bear then we phoned our contacts, we got on the phone and we spoke to them and said well look, how's this playing out. And it wasn't just a matter of understanding what damage was done, but it was also a matter of understanding what responses were going to be put into place, and how long it was going to take. And what we learnt from this process was that coal production was going to be affected in quite a large way and the reason for that was that the coal mines were flooded, so the mines, they had to extract the water from the mines before they could resume production again, and that took a lot longer than it was initially thought. So that affected output growth in the economy and then by activating our agricultural contacts we realised there was lost production and that was going to also affect output growth, but the big impact on lost agricultural production was actually through prices and its impact on the Consumer Price Index which is very important for the Bank, you know, because it's an indicator of inflation and we're an inflation targeting central bank.

Transcript

Inflation that is too high is a problem for the economy and individuals. Inflation is an increase in the prices of the goods and services you buy. Inflation can put pressure on your budget as your money won’t go as far as it used to.

Take, for example, your weekly visit to the supermarket. When prices are rising faster than your wages, over time you won’t be able to afford to buy as many items as before.

High inflation can come from a few sources including when businesses can’t supply enough products to meet customer demand, or when their costs go up.

That can be made worse if people come to expect high inflation, as it can be self-fulfilling and lead businesses to put through even bigger price increases.

High inflation makes it hard for households and businesses to plan ahead because they don’t know what prices they will be buying and selling at.

Managing inflation comes down to getting a good balance between supply and demand for goods and services. People often ask us how our interest rate changes affect inflation. Here’s the main way.

When inflation is too high, we increase our policy interest rate which increases borrowing costs for commercial banks. The banks usually pass on these higher costs by increasing their interest rates on loans.

People and businesses with loans will see their repayments rise. As people and businesses have bigger repayments on their loans, they have less money to spend on other things. This reduces demand for goods and services, economic activity slows down and this leads to lower inflation.

Our goal is to keep annual inflation between 2–3 per cent on average and we need to keep adjusting the policy interest rate until we are confident inflation is under control.

Maintaining inflation within this range preserves the spending power of money and encourages strong and sustainable growth in the economy, which benefits us all.

Transcript

The Reserve Bank of Australia has been buying government bonds to help lower borrowing costs for Australian households and businesses, to support people dealing with the economic impact of the COVID-19 health crisis.

To do this, we have been buying government bonds because their yield (or interest rate) has a large influence on the interest rates that households and businesses pay to borrow money.

We have committed to buying enough of these bonds to lower their yield and keep the 3-year government bond at around 0.25 per cent.

When we purchase bonds, we pay the financial institutions by crediting their deposit accounts at the RBA. We do not print banknotes to pay for the bonds.

Importantly, this means we are not buying bonds directly from the government. Instead, if the government wants to borrow money, it sells new bonds to investors, as it usually does.

We will work to keep interest rates low until progress has been made towards getting more people back into jobs and reaching our inflation target of between 2 and 3 per cent.

Transcript

The RBA’s purchases of government bonds help to keep interest rates low for households, businesses and governments and get more people into jobs.

Lower interest rates mean lower repayments on mortgages and other loans. This makes it cheaper to borrow and frees up cash for households and businesses to spend and invest. More spending and investment in the economy means businesses can hire more people.

A government bond is a loan created by a government and sold to an investor for a set period of time in return for regular interest payments.

We buy government bonds from financial institutions, such as banks. When we purchase them, we pay the financial institutions by crediting their deposit accounts at the RBA.

Importantly, this means we are not buying bonds directly from the government. Instead, if the government wants to borrow money, it sells new bonds to investors, as it usually does.

Job creation is an important national priority over the next few years and we will keep interest rates low until more people are in jobs, wages are growing faster and inflation is between 2 and 3%.