Monetary Policy Essay

1350 WordsMar 13, 20146 Pages
The Reserve Bank is responsible for Australia's monetary policy it a macroeconomic policy that may be used to smooth the effects of fluctuations in the business cycle and influence the level of economic activity, employment and prices. Monetary policy involves setting the interest rate on overnight loans in the money market (‘the cash rate’). The cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity and ultimately the rate of inflation. Interest rates are one of the main controlling factors in the economy, and also one of the main indicators of the health of the economy. To understand how interest rates work we need to know how they are managed and what issues are involved. Interest rates in Australia are mostly controlled by the Reserve Bank of Australia (RBA). The RBA is responsible for the level of official interest rates as a way of keeping the economy healthy. Essentially, this means controlling the amount of money flowing in and out of the economy. As a general term, this is known as monetary policy. In determining monetary policy, the Bank has a duty to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people. To achieve these statutory objectives, the Bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2–3 per cent, on average, over the medium term. Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term. What are the Objectives of Monetary Policy? Monetary policy is the primary macroeconomic policy used to manage the level of economic growth. The RBA’s policy stance can be described as expansionary or contractionary, reflecting the impact on economic growth. If the RBA wants to boost economic activity, it

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