Reserve Bank of Australia - Monetary Policy Framework - YouTube

If people come into the foyer of the Reserve Bank, and they're always welcome to do that

here at Martin Place, you will see on the wall on the right hand side there's some letters

etched into the black stone there, that are from our Charter, those words are from 1945,

they haven't changed since, and they're about stability of the currency, the maintenance

of full employment and the prosperity and welfare of the Australian people. Now they're

very big, broad, fine sounding words, how do we put that into practice? Well the way

we do that is we have a medium term target for inflation and we talk about holding CPI

inflation to 2 to 3 per cent on average over time. In other words, preserving the value

of money and that's very important, because a stable money is really a foundation for

economic prosperity more generally. If we don't have stable money then whatever else

we do we won't really be able to achieve broader economic prosperity. That framework's been

in place since the early 1990s, we have hit the target over that 20 year period, the average

inflation rate's pretty close to 2.5 per cent, so we regard that as successful by the terms

of the definition that we set ourselves and I think that's made a big contribution to

economic stability more generally and I don't think it's an accident that that period of

fairly low predictable inflation has coincided with pretty good sustained growth in the economy.

The target is a medium term one, so there's a little bit of flexibility over the short

term, and I think experience shows that in trying to do economic policy and trying to

control inflation there really isn't an ability to fine tune these things over very short

periods of time, you have to take a more medium term perspective. We've always thought that

and I think experience shows that that's the right way to do it, and as I say we've managed

to achieve that target fairly well over quite a long period of time now.

Sometimes things happen, economists refer to these things as shocks which just means

they're events which are not forecastable and not controllable. Things come along it

might be a rise in global oil prices because there's military tension in the Middle East,

it could be the celebrated banana price rise because the crop's been damaged by a cyclone,

it could be some government policy that raises or lowers the cost of medical care, so these

things come along and they affect the measured inflation rate over a short period, and we

can't stop that occurring, we can't control that, but the key thing is to have inflation

come back to the target over time and the policy decision is really about trying to

configure the interest rate setting so that we can be pretty sure that inflation will

come back over time and one of the key things that helps us do that is if people's expectations

about inflation in the future are well anchored near the target, that actually feeds through

to their behaviour, to the behaviour of wage setting, to the behaviour of business and

the way they set prices, if they behave consistently with the target that actually helps us achieve

it. So one of the things we watch is whether those expectations are indeed well anchored

or not and that helps us to work out what response we might need when inflation starts

to go off course.

While historically we've had this board for a very long time, since the early 1950s, it's

always been a board where the Governor is the Chairman but we have a majority of outside

people drawn from industry, from academia, from sometimes other parts of society who

bring a common sense perspective, they bring their own commercial or academic experience

and they apply a filter of the, I suppose you could say, the educated, informed, reasonable

person to the judgements that we on the inside want to bring to the decision and for us to

get the decision that we think is right we have to convince them. And that's as it should

be. That's a strong filter. I think our board, although unusual amongst other boards, there

are very few if any other central banks that have this kind of a board, but in our country,

for this kind of filter to be applied to the decision process, I think adds to the credibility,

to the legitimacy that the whole process has in the eyes of ordinary people and that's

very important. So it's worked quite well for 60 years now.