Squiz Shortcuts - The Reserve Bank of Australia

Your Shortcut to the Reserve Bank of Australia

There’s been a bit of argy-bargy lately between the federal government and the Reserve Bank of Australia over why our economy is so sluggish. The government blames the RBA’s interest rate hikes, but the bank insists they’re necessary to keep our economy healthy. So in this Squiz Shortcut, we’ll look at:

• the role of the Reserve Bank

• how it affects our lives

• and why its relationship with the government has hit a rocky patch.

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Squiz the Shortcut

What is the Reserve Bank of Australia?
The Reserve Bank of Australia - aka the RBA - is our central bank. It doesn’t have any commercial customers like the banks we’re used to, and you can’t open an account with it - but it’s vital to our economy because it makes sure our national finances are stable, our employment rate is healthy and our people are prospering financially. Those 3 things are written into its charter.

What does it do?
It has a few functions. The first is to print the nation’s banknotes and control their supply - that’s separate from the Royal Australian Mint, which produces our coins. How that cash makes its way through the economy largely depends on the cost of money. 

I didn’t know money had a cost…
Yep, it does. That’s called the cash rate, or the nation’s official interest rate, and the RBA sets it. So when you apply to borrow money from a commercial bank like NAB or CommBank, the cash rate influences how much interest you pay on your loan because the banks hinge their rates on it.

Got it. What else does it do?
The second thing the RBA does is act as a bank for the government and other commercial banks. Unlike your usual banks which have lots of shareholders, the RBA has only one and that’s the Australian government. It doesn’t set out to make a profit - it views its success through the performance of our economy. 

I heard that’s a bit slow at the moment…
It is, and sometimes the measures the RBA has to take to achieve a strong economy might seem like tough love to us. For example, our latest Gross Domestic Product (GDP) data from the Bureau of Stats - that's the value of everything our nation produces - shows that our economy has slowed right down to the point where it’s recorded its lowest rate of growth in 30 years, not counting the pandemic. 

And the government isn’t happy about it…
No, it isn’t because it means people aren’t spending because they’re struggling with cozzie livs - and that’s not going to grow the economy. But the RBA says the slowdown is necessary. It wants people to ease up on spending because when we continually buy things, it increases demand, which drives up prices and in turn, inflation. Right now, our inflation is too high, and it has been since post-Covid. 

Why is that?
We’ve been dealing with price rises on our food, petrol and energy due to global unrest in Ukraine and the Middle East - but after Covid, a lot of people - including those who were receiving government support through Job Keeper or Job Seeker - suddenly found themselves with a lot of disposable income because during that period they didn’t have their usual outgoings on transport, fuel, eating out or going on holidays.

What does this have to do with the RBA?
Good question. The RBA has raised interest rates - meaning people are paying more in home loan repayments. They’re trying to get people to think twice about buying that new TV, pair of sneakers, or morning coffee, so that inflation comes back within its target range of 2-3%. The bank has that target because a low and stable inflation rate is a sign of a healthy economy.

Please explain.
If prices go up faster than people’s incomes - which is the situation we find ourselves in now - people find it harder to afford the basics they need to live. So the RBA really needs to see that drop in inflation before it’ll consider lowering our cash rate. That usually sees the banks responding pretty quickly to cut their own interest rates, and that’s what mortgage holders are desperate for so their repayments go down. It’s a double-edged sword though, because higher interest rates has meant older people with cash deposits have been benefitting - and reports say their spending has been contributing to our inflation problem.

Got it. How long have we had a central bank?
The RBA has only existed since 1960, and before that the Commonwealth Bank did the banking for our federal government. The RBA was created by the Menzies Government, but it’s an independent organisation. The only input the government has is that the Treasurer appoints the RBA’s governor, and has the ultimate say over who’s on the bank’s Board. 

Who’s in charge at the RBA?
The current Governor is Michele Bullock. She’s an economist who worked her way up through the bank since she joined it in 1985 - and she’s the first woman to lead it. She heads up the RBA Board, which is made up of herself, Deputy Governor Andrew Hauser, and 7 others who bring a range of expertise, from law to big business, finance, and the energy market. The bank also has a Chief Operating Officer, 4 Assistant Governors, and around 1,400 staff.

How often does it make rate decisions?
The Reserve Bank Board meets 8 times throughout the year and the meetings last for 2 days. In making their decisions, they look at what’s happening in the domestic and overseas economies, and in the financial markets. They take a vote and make a decision based on the majority. After the Board’s decision is announced, Bullock explains in a press conference how they got there. 

Why has there been some tension lately between the government and the RBA?
Treasurer Jim Chalmers blames our slow economic growth on the RBA’s decisions to raise rates 13 times in a row between May 2022 and November 2023. That’s brought the current cash rate to 4.35% which is the highest it’s been in 12 years - and it’s stayed there for 11 months, even though there’s been lots of opinions from economists that it’s time for a cut. After the last GDP figures, Chalmers said the RBA was “smashing the economy”. And he’s had support in that view from PM Anthony Albanese.

What do the experts say?
Some economists have said that rather than lashing out at the RBA, Chalmers should think of alternatives - like winding back tax breaks, energy rebates and huge infrastructure projects, which all direct public money into the economy… One idea experts have floated is introducing a new tax to put the squeeze on all households rather than just mortgage holders. 

That doesn’t sound like a vote-catching strategy…
Exactly. With an election looming before May next year, Chalmers is in a quandary because winding back public spending or introducing a new tax isn’t going to be popular.

So he’s looking to the RBA for relief?
Yep. And rather than clapping back at the Treasurer, Bullock says she’s leaving the government’s monetary policy up to them. But she’s not going to be pushed into cutting rates just because people are finding it hard to make ends meet. Her advice was that some people might be forced to sell their homes. 

Ouch. So what’s next?
Well, Chalmers can see that people are hurting financially. He wants to restructure the RBA in line with recommendations from an independent review which released its final report and recommendations last year. That plan would see the RBA Board split into 2 parts - one to look after monetary policy that specialises in setting rates, and one to look after the day-to-day running of the bank. But last week, the Coalition withdrew its support for the proposal.

Why?
It reckons the government could stack the rates committee with Labor-aligned figures, which could potentially interfere with the bank’s independence. 

What’s his next move?
Chalmers now has to resort to securing support from the Greens. In the meantime, the government and the RBA are locked in a stalemate, so he won’t be able to rely on rate cuts alone to get our economy humming again.

Newsmakers on the people behind the headlines

Kate Watson has just wrapped up her first interview series Newsmakers, where she chats with the people behind the headlines. If you're into business and the economy, her conversation with John McDuling from Capital Brief is worth a watch. Australian business news has typically been dominated by a few big names, but Capital Brief reckons there’s room for more - especially when it comes to news that services “decision-makers in the new economy”. Curious about what that means? Watch Kate’s interview with John on YouTube.

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