monetary policies

Monetary Policy

A policy operated by the RBA to manipulate financial variables, primarily interest rates, to enhance welfare and prosperity for Australians.

RBA

The Reserve Bank of Australia, responsible for conducting monetary policy on behalf of the government.

Cash Rate

The interest rate that applies to borrowing and lending by banks in the overnight money market, which the RBA manipulates to influence other interest rates.

Low Inflation

A medium-term objective of the RBA, defined as consumer price inflation between 2 and 3 percent on average over time.

Full Employment

An economic goal pursued by the RBA, aimed at achieving maximum employment without threatening low inflation.

Economic Growth

A key objective of monetary policy, pursued after achieving low inflation.

Open Market Operations (OMOs)

The RBA's method of manipulating the cash rate by buying and selling financial instruments in the cash market.

Quantitative Easing (QE)

A less conventional monetary policy measure used by the RBA to inject liquidity into the economy, particularly during economic downturns.

Target Cash Rate (TCR)

The interest rate set by the RBA to guide the cash market and influence overall economic activity.

Sterilised Intervention

RBA actions to offset liquidity changes in the cash market when intervening in the foreign exchange market.

Expansionary Monetary Policy

A policy stance where the cash rate is low enough to stimulate economic activity, typically below 3.5%.

Restrictive Monetary Policy

A policy stance where the cash rate is high enough to dampen economic activity, typically above 3.25%.

Transmission Mechanism

The process through which changes in interest rates affect economic activity through various channels.

Cost of Credit Channel

The impact of interest rate changes on borrowing costs, influencing consumer and business spending.

Cash Flow Channel

The effect of interest rates on disposable income, affecting consumption and investment decisions.

Availability of Money and Credit Channel

How higher interest rates can reduce loan approvals and access to credit.

Asset Prices Channel

The relationship between interest rates and asset values, where higher rates can lead to lower asset prices.

Exchange Rate Channel

The correlation between interest rates and the exchange rate, where higher rates can lead to an appreciation of the currency.

RBA Independence

The ability of the RBA to make monetary policy decisions free from political influence, enhancing its effectiveness.

Long Impact Lag

The time it takes for monetary policy changes to fully affect the economy, which can be up to two years.