Reserve Bank of Australia (RBA)

What Is the Reserve Bank of Australia (RBA)?

The Reserve Bank of Australia (RBA) is the central bank of Australia. The bank sets the country's monetary policy and issues and manages the Australian dollar. The RBA is involved in banking and registry services for federal agencies and some international central banks. The bank, entirely owned by the Australian government, was established in 1960. Philip Lowe currently serves as Governor. He succeeded Glenn Stevens in 2016.

Key Takeaways

  • The Reserve Bank of Australia (RBA) is Australia's central bank, first established by government decree in 1960.
  • The bank maintains Australia's monetary policy and manages its currency, the Australian dollar.
  • The RBA has 3 mandates: a stable currency; full employment; and economic growth.

Understanding the Reserve Bank of Australia

The Reserve Bank of Australia manages the Australian dollar by setting the interest rate in overnight money markets. This interest rate filters through the rest of the financial system, affecting the rates at which banks will lend to businesses and consumers. The goal of the Reserve Bank of Australia is to set the interest rate low enough to promote maximum Australian employment and economic growth, but not so low that it sparks inflation above 2% to 3% per year.

The Reserve Bank of Australia has three mandates:

  1. The stability of Australia's currency
  2. Maintenance of full employment in Australia
  3. The economic prosperity of the people of Australia

Two boards manage the RBA, the Reserve Bank Board, and the Payments System Board. The Reserve Bank Board meets 11 times per year, on the first Tuesday of each month except January. During these meetings, they assess and discuss economic conditions and to decide on interest-rate policy. After the meeting, the bank announces monetary policy decisions and implements those decisions through the buying and selling of short-term government debt in the open market.

Among other things, the Payments System Board oversees risk in the financial system, competition in the payment service market, and promoting an efficient payment system. 

History of the Reserve Bank of Australia

The history of the Reserve Bank of Australia’s dates back to 1911 when legislation established the Commonwealth Bank of Australia, a decade after the country achieved independence from Great Britain. It was not initially conceived as a central bank, and it was not charged with managing the Australian currency until 1924 when the Commonwealth Bank Act put it in charge of issuing the Australian pound. Australia retired the Australian pound in 1966 and replaced it with the Australian dollar (AUD), which was divided into 100 cents.

Starting in 1967, the Reserve Bank of Australia began pegging the Australian dollar to the U.S. dollar (USD). This relationship between the U.S. dollar and the Australian dollar continued until 1983 when the Aussie was allowed to float freely, based on supply and demand in international money markets. The Australian dollar has become a popular currency with foreign exchange traders, who value it for its ability to hedge risks associated with more broadly traded currencies.