Reserve Bank of Australia

Reserve Bank of Australia
Reserve Bank of Australia logo.svg
RBA Building.jpg
RBA headquarters, 65 Martin Place, Sydney
HeadquartersSydney, New South Wales, Australia
Coordinates33°52′05″S 151°12′42″E / 33°52′05″S 151°12′42″E / -33.8681; 151.2117
GovernorPhilip Lowe
Central bank ofAustralia
CurrencyAustralian dollar
AUD (ISO 4217)
Reserve requirementsNone
Interest rate target0.75%[1]
Websitewww.rba.gov.au

The Reserve Bank of Australia (RBA) is Australia's central bank and banknote issuing authority. It has had this role since 14 January 1960, when the Reserve Bank Act 1959 removed the central banking functions from the Commonwealth Bank.[2]

The bank has the responsibility of providing services to the Government of Australia in addition to also providing services to other central banks and official institutions.[3] It currently consists of the Payments System Board, which governs the payments system policy of the bank, and the Reserve Bank Board, which governs all other monetary and banking policies of the bank.[4]

Both boards consist of members of both the bank, the Treasury, other Australian government agencies, and leaders of other institutions that are part of the economy.[4][5] The structure of the Reserve Bank Board has remained consistent ever since 1951, with the exception of the change in the number of members of the board.[2] The governor of the Reserve Bank of Australia is appointed by the Treasurer and chairs both the Payment Systems and Reserve Bank Boards and when there are disagreements between both boards, the governor resolves them.[4][6]

From the middle of the 19th century into the 1890s, the prospects of a national bank forming grew. In 1911, the Commonwealth Bank was established, but did not have the authority to print notes, which was a power that was still reserved to the Treasury. A movement toward reestablishing the gold standard occurred after World War I, with John Garvan leading various boards in contracting the money supply on the route to doing so, and the gold standard was instituted for both the British pound sterling and the Australian pound in 1925.[7]

During the Great Depression, the Australian pound became devalued, no longer worth the same as the pound sterling, and formally departed from the gold standard with the Commonwealth Bank Act of 1932.[8] Legislation in 1945 led to regulation of private banks which H.C. Coombs was opposed to, and when he became governor in 1949, he gave them more overall control over their institutions.[2][7] When the monetary authorities implemented the advice of Coombs to have a flexible interest rate, it allowed the bank to rely more on open market operations.[7] In 1980 the issue of short-term government bonds – Treasury notes of 13 and 26 weeks duration – changed from a tap system, in which the price was set, to a tender system in which the volume of stock was set and the price determined by the market. Soon afterwards the tender system was extended to the issue of longer-term government bonds.

The float of the Australian dollar happened in 1983, around the same period of time that the financial system in Australia was deregulated. Administration of the banks was transferred in 1998 from the bank to the Australian Prudential Regulation Authority and the Payments System Board was created, while the bank was given power within the board in the same year.[2] The current governor of the Reserve Bank is Philip Lowe, who succeeded Glenn Stevens as governor on 18 September 2016.[9]

History

Mid 19th century–1924

Portrait of a man dressed in a suit.
Prime Minister Andrew Fisher, whose government created a commercial bank owned by the government, but not a central bank.

The proposition of a national bank in Australia began to be raised in the middle of the 19th century. This interest accelerated significantly in the 1890s due to an austere collapse of the financial and banking sectors at the beginning of that decade. The Australian Labor Party consequently formed during the same decade and proposed a bank should be formed, which would be a protected and cheap way of having financial services. The party designed a platform in 1908 for a "Commonwealth Bank", which would be a combination of both a commercial and central bank.[7]

Regardless, Fisher's Labor government introduced legislation in 1911 for a government-owned commercial bank, without a complete central banking component. He stated that "Time and experience will show how its functions for usefulness may be extended [towards central banking]." The only function at the time that made the bank characteristic of a central one was that it was the banker to the Australian government, in addition to it being the same for the states. For the time being, the Treasury of Australia maintained the role of issuing bank notes through the Australian Notes Act 1910.[7]

The Commonwealth Bank of Australia gradually developed into the central bank of Australia. In response to the disruption of trade during World War I (1914–1918) the Commonwealth Bank began to manage the debt of the Australian government. Nevertheless, at the end of the war, the bank continued to have a primary role as a savings and trading bank. World War I had caused the currency of Australia to move away from the gold standard, in order to fund a great increase of government spending, as did the United Kingdom and other parts of the British Empire.[citation needed]

A hand holding a gold bar surrounded by several gold bars and other gold pieces in the background.
ANB Board member John Garvan led the movement toward reestablishing the gold standard.

The value of the Australian pound remained tied to the pound sterling. Inflation in Australia thus increased, less than in Britain, but more than in the United States. The case for a central bank was increased by the need for the government to cut spending after the war to reduce its debt. Commonwealth Bank Governor Denison Miller had been arguing for the issue of Australian currency to be switched from the treasury to the bank, as it had more staff and more monetary knowledge.[7]

The Australian Notes Board (ANB) was created in 1920 and partially acceded to the request of Miller, in having four directors, with the governor of the bank being an ex officio member.[2] The ANB began to follow a policy of board member John Garvan, in contracting the money supply, with the goal of reducing prices so that free convertibility of the Australian pound to gold could be re-established at pre-war rates, that is return to the former gold standard.[citation needed]

This was accomplished by refusing the exchange of notes for gold and it was hoped that this would lower domestic prices and raise the exchange rate for the Australian pound. When gold arrived from New York the government sold securities in order to diminish the effect of monetary expansion, therefore executing the first open market operations in the history of Australia and thus the first attempt of central banking.[7]

1924–present

The Department of Treasury issued notes until 1924, when this responsibility was transferred to the Commonwealth Bank.[2] The ANB was abolished by the Commonwealth Bank Act 1924, due to Treasurer and Country Party Leader Earle Page wanting to end the monetary contraction which particularly hurt his farming constituents, who were as a result receiving reduced export prices.[7] The new Board of Directors replacing it,[2] which was composed of various areas of the industry, soon appointed Garvan chairman, and thus he continued his policies. In 1925, both the pound sterling and Australian pound returned to the pre-war gold standard. The primary role of the Commonwealth Bank continued to be a savings and trading bank, even though the government attempted to make the bank into a central bank through its actions in 1924.[7]

Legislation was introduced to the Parliament at the climax of the Great Depression, in May 1930, by Treasurer E.G. Theodore, to transfer central banking powers from the Commonwealth Bank to a new central bank, but this failed.[7] The Australian pound was devalued in 1931 and it ceased to be tied to the pound sterling. The Reserve Bank departed from the gold standard with the Commonwealth Bank Act 1932, which made the notes no longer exchangeable into gold and allowed the bank not to keep any gold reserves.[8] The monetary policy of the bank from 1931 until the early 1970s had been to keep a stable exchange rate with the pound sterling.[7]

Through the new Commonwealth Bank Act and the Banking Act 1945, the board was replaced by a six-member council, consisting of bank and treasury officials. It additionally formalised the bank's administrative powers of monetary and banking policy and exchange control and also stated the governor was responsible for managing the bank.[2] Highly debated legislation in 1945 caused high amounts of regulation on private banks, which later-Governor H.C. Coombs was opposed to, along with his opposition to bank nationalisation in 1947.[7] When he became governor in 1949, he allowed private banks to have more control over their liquidity and attempted to introduce market-based monetary policy.[2][7] He also warned of the possibility of stagflation in 1959.[7]

Legislation in 1951, substituted the council by a 10-member board which included the governor, deputy governor and the secretary to the treasury. The board took over the management of the bank from the governor. The Reserve Bank Act 1959 (23 April 1959) took out the part of the Commonwealth Bank that executed central bank functions and placed it into the new Reserve Bank, while the commercial and savings bank functions stayed with the Commonwealth Bank.[2] This finally created a separate central bank for Australia in 1959, which took effect 14 January 1960, many years after several other nations already had one and similar to the early proposal by Treasurer Theodore.[2][7]

In the mid-1960s, monetary authorities accepted Coombs' conclusions and allowed a flexible interest rate, making it easier for the bank to rely on open market operations.[7] The Exchange Control was abolished after the float of the Australian dollar occurred in 1983. In the five years after the Campbell Committee probe, 1979–1984, the financial system in Australia became deregulated. Another probe was the Wallis Committee in 1996, which took effect in 1998. The effects were the transfer of overseeing the banks from the RBA to the Australian Prudential Regulation Authority (APRA) and the creation of the Payments System Board (PSB), which would attempt to maintain the safety and performance of the payments system. The bank was given powers within the PSB through additional legislation in 1998.[2]

In August 1996, then Governor-designate Ian Macfarlane and the Treasurer issued a Statement on the Conduct of Monetary Policy which restated the roles of the Reserve Bank and the Government of Australia. It affirmed government endorsement of the Reserve Bank's inflation objective, which was introduced in 1993. A change of government in December 2007 led to another Statement, which was issued by both former Treasurer Wayne Swan and Reserve Bank Governor Glenn Stevens. This amends previous statements by giving the bank independence and encourages transparency and communication.[2]