RBA watching 101: Economics & Rates

Research evidence excerpt

RBA watching 101: Economics & Rates

The RBA’s dual mandate

The Reserve Bank of Australia (RBA) derives its functions and powers from the Reserve

Bank Act 1959 and is responsible for monetary policy, financial system stability,

payments system policy, banknote issuance and banking services for the Australian

Government. The 2023 Review of the RBA led to the 2024 amendments to the Reserve

Bank Act 1959 which shaped the RBA’s current structure.

The RBA’s overarching objective is to promote the economic prosperity and welfare of

the Australian people, delivered operationally through a dual mandate of price stability

and full employment. The inflation objective is defined as a flexible 2-3% CPI target,

with policy aimed at returning inflation to the midpoint over time.1 Full employment

refers to the maximum level of employment consistent with low and stable inflation.

The dual mandate can lead to trade-offs

The RBA's dual mandate is unusual: most other central banks only target inflation. The

dual mandate can lead to trade-offs in the short run. Rate hikes tend to lower inflation

and raise unemployment, while cuts do the opposite. This inverse relationship is

captured by the Phillips curve (Exhibit 1, Exhibit 2).

Exhibit 1: Inflation has averaged 2.7% since 1993 Exhibit 2: The RBA’s dual mandate presents a trade-off given the

Headline Inflation (% y/y) and unemployment rate (%) inverse relationship between unemployment and inflation

Trimmed mean inflation (y/y, %) vs unemployment (%) since 1993

y/y)

(% 6

inflation

3 4

mean

0 2

Trimmed

-3

1985 1990 1995 2000 2005 2010 2015 2020 2025 0

3 5 7 9 11 Target band Inflation Unemployment rate Unemployment rate (%)

Source: ABS, RBA. Note: Inflation excludes interest charges and tax changes. Source: ABS