Last editedJune 20213 min read
Like other central banks, the Reserve Bank of Australia, or RBA, plays an important role in the country’s fiscal management. We’ll take a closer look at its origins and function below.
What is the Reserve Bank of Australia?
If you follow economic news, you’ve probably seen and heard references to the RBA. Yet what is the Reserve Bank of Australia, exactly, and why is it so important? The RBA is Australia’s central bank, with current powers established during the Reserve Bank Act of 1959. However, as an institution it goes back further to 1911 as the Commonwealth Bank of Australia. It manages the country’s currency and outlines Australia’s monetary policy to promote stability. It performs vital roles in defining banking practices and works closely with other international central banks.
Who owns the Reserve Bank of Australia?
There’s a common misconception that the bank is owned by an individual, family, or group. However, the simple answer to ‘who owns the Reserve Bank of Australia’ is the government. The bank was established in 1960 and has been governed by several managers over the years. Currently, economist Philip Lowe governs the RBA but its ownership lies in the hands of the government – and by extension, the people.
In terms of structure and day-to-day organisation, there are two boards that oversee the RBA. The Reserve Bank Board is one of them, meeting 11 times per year on the first Tuesday of every month except for January. These meetings are used to discuss interest rate policies and the wider shape of the economy. The outcome of these discussions is the bank’s monetary policy, including buying and selling government debts.
The second board is the Payments System Board. This is responsible for overseeing systemic risk, promoting efficient payment systems, and ensuring healthy competition within the payment services market.
Reserve Bank of Australia role and function
We’ve already touched upon a few of the RBA’s main functions above, including setting interest rates to manage the Australian dollar. The overarching strategy is to set a low enough interest rate to promote economic growth and employment, without setting off inflation. When the RBA sets an interest rate, this filters through to impact lender rates for businesses and consumers.
Here are a few more of the primary roles of the Reserve Bank of Australia:
Maintain stability for the Australian dollar
Manage Australia’s gold reserves
Manage Australia’s foreign exchange reserves
Provide banking and registry services to government agencies
Provide financial services to certain overseas central banks and institutions
Control risk in the country’s financial system
Promote payment system efficiency
Reserve Bank of Australia exchange rates
One of the bank’s most important roles is related to foreign exchange rates. The RBA helps monitor currency rates, creating supply and demand for the Australian dollar by buying and selling it against other currencies. In most cases, these interventions are conducted against the US dollar due to high levels of liquidity. However, Reserve Bank of Australia exchange rates interventions might involve any time zone or currency market.
In addition to measuring exchange rates against the US dollar, you can also use the TWI or trade-weighted index. The RBA looks at the weighted average of a basket of foreign currencies to determine whether the AUS is rising or falling. While it’s common for the AUD/USD and TWI to move together, at times they will diverge. During these times the RBA will examine the situation closely to see if any intervention is needed.
Reserve Bank of Australia interest rate history
In addition to exchange rates, the other primary goal of the RBA is to maintain a stable economy using interest rates as a tool. The Reserve Bank of Australia interest rate history dates back to when it was the Commonwealth Bank from 1911 through 1959. During this period, the bank took on authority to change interest rates in order to weather the upheaval of the Great Depression and World War Two.
The 1960s were a time of economic prosperity in Australia, with low interest rates to match, before a period of high inflation and higher interest rates in the 1970s. However, interest rates hit a record high of 17% from June 1989 through April 1990. More recently, to weather the global financial crisis of 2008, the RBA dropped interest rates to only 3% in April 2009. Rates have dropped again recently to help maintain stability throughout the coronavirus crisis.
Because the Reserve Bank of Australia has a direct impact on lending rates and currency exchange, it’s important to keep an eye on the latest news. You can check the RBA website for in-depth details.
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