The paper attempts to explain the meaning of the monetary policy and its objectives. The way Reserve Bank of Australia uses monetary policy to achieve various objectives has been outlined in the paper.
Monetary policy is a decision set out by the Reserve Bank of Australia concerning interest rate on overnight loans in the money market. This interest rate has a great influence on the other interest rates in the economic markets. Eventually, the decisions made by the lenders and borrowers in the financial market will be affected. The Reserve Bank Act of 1959 led to the establishment of the Reserve Bank of Australia as the central bank of Australia (Picker 82). Planning, setting, and implementing of monetary policy of the country are the core functions of the Reserve Bank of Australia. The main objectives of the monetary policy include: Ensuring that the currency of Australia remains stable by maintaining a low inflation rate, promoting the economic prosperity of the people of Australia by ensuring stability in financial systems, and promoting employment opportunities in Australia (Picker 81). The Reserve Bank Board is responsible for setting monetary policy aiming at the achievement of the objectives in the medium term, therefore promoting sustainable economic growth. The implementation of the monetary policy is carried out by the Bank’s Domestic Markets Department. They ensure that the cash rate set out by the board is maintained. The cash rate is the interest rate that financial intermediaries charge on the overnight loans transacted between them (Picker 88). The cash rate influences other interest rates in the money market, therefore changing the interest rate structure in the economy.
The work of the Reserve Bank is to use the open market operations to maintain the target level set by the Reserve Bank Board. This is achieved by controlling the funds supply in the money market. The funds under the control of the Reserve Bank are the ones used by the banks in settling transactions among themselves (Picker 88). The movements of demand and supply of the funds raise or lower the cash rate. The effect trickles down to other rates including deposit and lending rates of banks and other financial institutions. Investors and consumer behavior are part of economic activities that are triggered by the prevailing interest rates. Interaction between aggregate demand and aggregate supply will influence the inflation level. With good monetary policy, the inflation rate can be put in check and this will ensure stable prices of goods and services. Eventually, economic prosperity will be achieved.
Economic prosperity can be achieving the d through the use of monetary policy. The Reserve Bank has the mandate of ensuring the stability of the dollar as well as the prices of basic commodities.
Picker, Anne. International Indicators and Central Banks. New Jersey: John Wiley & Sons, 2007.