Policy Approach

Definition

Monetary policy can be defined as those actions by the Reserve Bank of Australia that are designed to affect the availability of money in the Australian economy. The RBA achieves this by altering the supply of money, which in turn will affect the cost at a retail level. This will have implications for both aggregate supply and aggregate demand, and through this the RBA is able to try and achieve economic goals as set out in their charter.

The supply of money is measured in a variety of ways. Two commonly used measures of the money supply are M3 and Broad Money.

M3: This is calculated to be the total volume of coins and notes in the hands of the general public, plus any deposits in the bank, plus any deposits that building societies and credit unions have with the banks.
Broad Money: As the name implies, this measure of money is slightly more inclusive than the measure of M3. Broad money is M3 plus any deposits that are held with Non-Bank Financial Institutions (NBFIs). An NBFI is a financial institution that is licensed to hold deposits, but is not a bank. For example, building societies, life insurance companies and superannuation firms are all NBFIs.

It is very important at this stage to note that the RBA implements monetary policy almost completely independently of the federal government. Although the treasurer does sit on the board of the RBA, the other eight members have a vote that is equal in value. It is through this structure that the RBA is able to focus on the goals that they are trying to achieve, rather than being distracted by any impending political events, such as an election. As such, if it is in the best interests of the Australian economy for interest rates to rise in the weeks preceding a federal election, then that is what the RBA will implement. The needs of the market over ride the political desires held by the government of the day.

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