Monetary Policy in Australia

Definition of the policy and how it operates

Monetary policy refers to actions taken by the Reserve Bank of Australia to affect the cost, availability and demand for money. The primary aim of monetary policy is the achievement of price stability, inflation between 2 and 3 per cent on average over the cycle. The RBA also has an agreement to maximise economic growth and employment growth, however the RBA argues that by achieving low inflation, growth and employment can be sustained.
The primary instrument of monetary policy is the overnight cash rate, which the RBA controls through open market operations. The RBA uses market operations to create a surplus or shortage of cash by buying and selling government securities. The cash rate is used as the basis of monetary policy because it underpins all other interest rates in the money market.
The secondary instrument of monetary policy is the RBA’s intervention in the foreign exchange market. The RBA does not set a particul...