The Reserve Bank
The Reserve Bank is a country’s independent central bank with the responsibilities of issuing the country’s bank notes and currency; regulating the official cash rate, ie interest rate and implementing monetary policy. In Australia, the central bank is the Reserve Bank of Australia, known as the RBA. Operating under the Reserve Bank Act 1959, the RBA provides services to the Government and Government agencies as well as managing the nation’s foreign exchange and gold reserves.
The key purpose of the RBA is to implement policies and initiatives which have a contributing effect to stabilising Australia’s currency, to employment and to general economic prosperity. This involves affecting monetary policy and actions to support a strong financial and payments systems.
As a statutory authority, the powers of the RBA are governed by the legislation. The Governor of the RBA, currently Mr Phillip Lowe, manages the activities of the RBA and there are 2 Boards.
The most well-known function of the RBA is to regulate the official cash rate, which is effectively the interest rate. The Reserve Bank Board meets on the first Tuesday of each month (excluding January) with interest rates on the agenda. The financial markets await with eager anticipation the ‘announcement by the Reserve Bank’ on interest rates following these meetings.
Prior to the meeting there is always much speculation by economic experts and commentators as to whether the RBA will lower or raise interest rates in response to current economic conditions. Announcements of interest rate changes are made in terms of bases points. A bases point being a lowest denominator, which in terms of interest rates is .1%
While the cash rate represents the interest rates that banks pay to lend to each other and is essentially the price that banks are paying to source their funds, there is a flow-on effect to consumers from these interest rate changes. Following the RBA’s announcement, the spotlight is thrown onto banks and lenders, in particular in the home loan lending sector, to see if they will ‘pass on’ any interest rate changes.
Home owners with a variable interest rate mortgage are particularly impacted by these interest rate changes. If rates are lowed by 1 bases point, ie .1% this can represent a significant savings on home mortgages for home owners. If interest rates are increased, this can increase their monthly repayments and put pressure on household spending.
During the COVID-19 pandemic the RBA implemented unprecedented monetary policy to support the economy by lowering the official interest rate to historic lows of .25% and buying Government bonds which effectively made borrowings cheaper for the banks and thus eased pressures on borrowers.
The RBA is headquartered in Sydney, NSW.