RBA and Monetary Policy: Role, Effects, and Risk Management

Running Head: FINANCIAL MARKETS AND INSTITUTIONS
RBA and monetary policy

Financial markets and Institution 1
Contents
Introduction...........................................................................................................................................2
Role of RBA in conducting monetary policy.........................................................................................2
Australia’s economic environment and monetary policy effects...........................................................4
Importance of Leverage.........................................................................................................................5
Dealing with risks..................................................................................................................................5
Authorised Deposit Institutions.........................................................................................................5
Basel Accords....................................................................................................................................6
Conclusion.............................................................................................................................................7
References.............................................................................................................................................8

Financial markets and Institution 2
Introduction
The central bank of Australia is set up to execute various activities such as
implementing monetary policies, issuing banknotes, performing functions to maintain a
strong financial system and setting inflation target. RBA also provides banking services to the
Australian Government, official institutes and banks. It also manages gold and foreign
exchange reserves of the country ("About the RBA | RBA", 2017). The following report
contains the role played by RBA in implementing monetary policy and effects of its
implementation on financial markets. It also includes the brief about the current economic
environment of Australia mainly in context with inflation and interest rate and how monetary
policy helps in maintaining the financial stability in the country.
The report also states the importance of leverage for central banks like RBA. A brief
about ADI dealing with credit, liquidity, operating and interest rate risk and also how Basel
Accords help in dealing with these risk is also provided in the report.
Role of RBA in conducting monetary policy
Australia’s central bank is responsible for country’s monetary policy. The main aim
of RBA to implement it is to bring stability in the prices, full employment and overall welfare
of Australian people. To achieve these objectives, bank has set an inflation target and it
focuses on keeping the inflation rate on an average of 2-3 percent in the economy. Monetary
policy focus on achieving this target as it is primary condition to promote sustainable growth
and development of economy. By controlling inflation, the value of money will be preserved
and economy will have a sustainable growth for a longer period of time. The framework of
policy is based on its medium term objective of controlling inflation. The targeted rate is
sufficiently low and does not have a large impact on economic decisions. For taking
monetary policy decision, Reserve Bank Board hold a meeting eleven times every year and
the bank’s staff prepare a paper which contains all the detailed information about
developments taken place in country’s economy and international economies. The meeting is
ended by the senior staff and the decisions taken are communicated to the public ("Monetary
Policy | RBA", 2017).
RBA plays an important role in implementing monetary policy. The domestic market
department of bank has to maintain the conditions prevailing in the money market on a daily
basis, so as to keep the cash rate near to the targeted rate of 2-3 percent which is decided by
the board. Cash rate is that rate which influence other interest rate and is the basis for
formulating the structure of other interest rates. RBA uses its domestic market operations,
also known as open market operations in order to keep the cash rate close to the target. These
operations basically means buying and selling of government securities in open market.
Managing the supply of funds available to the banks, helps RBA in achieving its target
("Monetary Policy | RBA", 2017).