June 25, 2025 • 8 mins
Given we expect interest rates to fall in coming months, explain monetary policy – what it is, how it works and how the Reserve Bank controls the economy.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to Ask Fear and Greed, where we answer questions
about business, investing, economics, politics, and more. I'm Michael Thompson
and hello Sean Ailmer. Hello Michael, Sean. Today's question. I
mean it's very much an economics question. I think it
might be so put on your professor's cap. Good good,
Good to Alma. Given we expect interest rates to fall
(00:24):
in coming months, can you please explain monetary policy what
it is. We're starting with the basics, how it works,
and how the Reserve bank controls the economy. Now there's
a lot in that. You have about five minutes to
do it.
Speaker 2 (00:44):
I'm confident I can do it.
Speaker 3 (00:46):
Okay, you can sort of interchange monetary policy and interest rates.
It's not one hundred percent correct, Okay, but when people
talk about monetary policy, we're talking about interest rates mostly,
and we were talking about fiscal policy. We're talking about
taxation and revenue and that type of stuff.
Speaker 2 (00:59):
Okay.
Speaker 3 (01:00):
So what we're trying to do, what the reserve banks
trying to do with monetary policy, is influence aggregate demand
in the economy.
Speaker 2 (01:07):
That's a very technical term. Look at your eyes. It's
just basically how much people buy and sell.
Speaker 3 (01:12):
Okay, So we got that they're trying to influence employment.
Speaker 2 (01:17):
Got that one.
Speaker 3 (01:18):
And they're trying to influence inflation prices, so prices, jobs, output.
Speaker 1 (01:24):
So it's like a trident.
Speaker 2 (01:27):
Yes, that's it.
Speaker 3 (01:29):
The Reserve Bank is responsible for montrepoloity in Australia. It
decided that it wants to target a rate and it
doesn't target a specific number. It targets a ban two
to three percent, So we talk about the Reserve banks
two to three percent target ban. That's what it's all about.
It can use other stuff and it has done during
(01:49):
the pandemic, things like term funding to the banking systems,
so providing money for the banking system sort of targets
for the purchase of comment bonds.
Speaker 2 (01:58):
But all gets big technical.
Speaker 1 (01:59):
So let's just park and that's more exceptional circumstances, is it,
rather than kind of.
Speaker 2 (02:03):
Running the mill stuff That is not running the mill
starf at all.
Speaker 1 (02:05):
All right, we'll put that to one site.
Speaker 3 (02:07):
So the whole goal economic prosperity, and under the Reserve
Bank Act it's looking for price stability and full employment.
They're both as important as each other. Been a lot
of debating in recent years. They don't care about full employment.
They don't care about price stability. That's not true. I
mean we've had full employment, so they certainly haven't failed
on that. But what the Reserve Bank of Michelle book
(02:29):
the government has said is that price stability at this point,
up until now, but maybe not going forward, but up
until now, price stability has been the most important of
those two things understood. Essentially just manages the trade off
between growth, employment and inflation. It's also responsible officially for
financial stability, so things like run on banks and making
(02:50):
sure money flows through the economy properly. The reserve banks
responsible for that. So monetary policy is also supposed to
look after financial stability.
Speaker 2 (02:59):
So they all get in.
Speaker 3 (03:00):
A room, God doess a lot, have a power chat
about employment, chat about inflation, chat about economic growth. They say, oh,
we might lift interest rates today because we need to
slow down economic growth and we worry about inflation. Or
they might say we wouldn't mind cutting interest rates because
we aren't so worried about inflation and we need to
boost economic growth. What is not unique in Australia, but
(03:25):
certainly a benefit of our system is that the Reserve
Bank is independent of government.
Speaker 2 (03:28):
It can do that.
Speaker 3 (03:30):
Without any favor or fear of retribution from government. So
the big debate in the US is Donald Trump putting
pressure on their central bank, the US Federal Reserve. About that, now,
the guy who's running down, a guy called J. Powell,
is pretty determined to filler, and he is determined to
be independent. And he's one of the great things about
(03:50):
modern democracies that their central banks are independent.
Speaker 1 (03:56):
Okay, all right. If there is a lot in all
of that, right, boil it down too. At its essence,
what is going to affect me most of all is
interest rates. Right, So the single most important factor affecting
(04:16):
interest rates inflation.
Speaker 3 (04:18):
It depends where we are in the cycle. It has
been inflation for the last few years, without a doubt.
What we've heard from Reserve Bank is then now worried
about economic growth and economic growth slash full employment. If
you have slow growth, you are likely to get a
tick up in the labor market. Hasn't really happened yet,
but that's what people think. So I think going forward,
(04:39):
the Reserve Bank's going to talk more about economic growth
and full employment. Previously it's all been about inflation.
Speaker 1 (04:44):
Okay, all right, let's take that as all understood, right.
Speaker 3 (04:50):
Don't laugh, BA think about economics is you just assume
away anything is just a bit tricky.
Speaker 2 (04:55):
Just pretend we know about you're assuming we understand that,
and hopefully.
Speaker 1 (04:58):
There won't be a quiz at the end. Who makes
these decisions? Who are who are the actual people behind
behind all of this because at the end they at
the end of the day, they are just people trying
to take in a huge amount of information and make
decisions that can change the course of the Australian economy.
Speaker 3 (05:16):
Yes, so there was a change to the Reserve Bank
last year. We ended up now this year we ended
up with a Monetary Policy Board. The Montary Policy Board
has the Governor, a woman called Michelle Bullock, the Deputy
Governor Andrew Housen from his British guy, the Secretary to
the Treasury, and then sit in the Secretary to the Treasuries,
(05:38):
the guy called seven Kennedy, and then six non executive
members basically business leaders. So Marnie Baker, she's been on
the show. He used to run Ben Benning on Adelaide Bank.
She's one of those six people. In harp Overy, well known,
highly credentialed academic Carolyn Hewson Allison Watkins used to run
Coca Colorametal.
Speaker 2 (05:57):
So they're the guys that get in there.
Speaker 3 (05:59):
There is irbank boffins come in and say this is
what we think is happening, put up a lot of charts,
you know, chat about the weather, do whatever.
Speaker 2 (06:06):
At the end of it, the Reserve Bank.
Speaker 3 (06:07):
Probably comes down with I'm sure they would come out
with a recommendation based on what the chief economists of
the Reserve Bank says, a woman called Sarah Hunter, and
then the members vote on it.
Speaker 2 (06:18):
It has doesn't have to be a unanimous decision. It
has to be a majority of decision.
Speaker 1 (06:21):
How important is it that there are those business leaders
part of this decision because of that real world experience
beyond the walls of the Reserve Bank.
Speaker 3 (06:29):
So the Reserve Bank would argue that they've got these
great business liaison programs going on, so they know what's
going on.
Speaker 1 (06:35):
The way you said that suggests that you don't necessarily agree.
Speaker 3 (06:38):
They have worked at the Reserve Bank, and I know,
I mean, I know Michelle Bullock, I don't know Andrew Howser,
but I know a bunch of their leaders and they
had their lifelong Reserve bankers. So I think having people
from outside coming in and saying what they're you know,
seeing in real life is a really really good idea.
Speaker 1 (06:58):
Okay, especially someone like maney Aker who has worked at
a bank and has seen mortgages in action and the
impact of interest rates going up and down on real
world customers.
Speaker 2 (07:09):
Yeah, absolutely, okay, I.
Speaker 1 (07:13):
Think I mean, you exceeded the five minute time limit, sorry,
just marginally, And that might have might have been also
because of my contribution. If it had just if we
just cut me out and just focused on you, you were
probably within the five minutes. I think we've answered the
question out considering it was a three part question, and
it also led to the remarkable image of the Reserve
(07:33):
Bank as a as a trident kind of no, no,
you disagree with that?
Speaker 2 (07:39):
Oh no, no, we can go with that.
Speaker 1 (07:41):
I pickedure the Little Mermaid, you know, and King Triton
with his trident. You remember that, it's very.
Speaker 2 (07:48):
An obscure reference when it comes to the Reserve Bank.
Speaker 1 (07:50):
There, I'm trying to put it in terms that I
will remember and I will forever. Now remember those three
goals of the Reserve Bank, and I will use them
little Mermaid to do so.
Speaker 2 (07:58):
All right, Thank you very much, Sean, Thank you Michael.
Speaker 1 (08:00):
Remember if you've got your own question that you would
like us to answer them, please send it on through
via the website Fearangreed dot com dot au or jump
onto any of the social media platforms and we will
pop it on the list our Michael Thompson and this
is ask Fear and Great
Welcome to Ask Fear and Greed, where we answer questions
about business, investing, economics, politics, and more. I'm Michael Thompson
and hello Sean Ailmer. Hello Michael, Sean. Today's question. I
mean it's very much an economics question. I think it
might be so put on your professor's cap. Good good,
Good to Alma. Given we expect interest rates to fall
(00:24):
in coming months, can you please explain monetary policy what
it is. We're starting with the basics, how it works,
and how the Reserve bank controls the economy. Now there's
a lot in that. You have about five minutes to
do it.
Speaker 2 (00:44):
I'm confident I can do it.
Speaker 3 (00:46):
Okay, you can sort of interchange monetary policy and interest rates.
It's not one hundred percent correct, Okay, but when people
talk about monetary policy, we're talking about interest rates mostly,
and we were talking about fiscal policy. We're talking about
taxation and revenue and that type of stuff.
Speaker 2 (00:59):
Okay.
Speaker 3 (01:00):
So what we're trying to do, what the reserve banks
trying to do with monetary policy, is influence aggregate demand
in the economy.
Speaker 2 (01:07):
That's a very technical term. Look at your eyes. It's
just basically how much people buy and sell.
Speaker 3 (01:12):
Okay, So we got that they're trying to influence employment.
Speaker 2 (01:17):
Got that one.
Speaker 3 (01:18):
And they're trying to influence inflation prices, so prices, jobs, output.
Speaker 1 (01:24):
So it's like a trident.
Speaker 2 (01:27):
Yes, that's it.
Speaker 3 (01:29):
The Reserve Bank is responsible for montrepoloity in Australia. It
decided that it wants to target a rate and it
doesn't target a specific number. It targets a ban two
to three percent, So we talk about the Reserve banks
two to three percent target ban. That's what it's all about.
It can use other stuff and it has done during
(01:49):
the pandemic, things like term funding to the banking systems,
so providing money for the banking system sort of targets
for the purchase of comment bonds.
Speaker 2 (01:58):
But all gets big technical.
Speaker 1 (01:59):
So let's just park and that's more exceptional circumstances, is it,
rather than kind of.
Speaker 2 (02:03):
Running the mill stuff That is not running the mill
starf at all.
Speaker 1 (02:05):
All right, we'll put that to one site.
Speaker 3 (02:07):
So the whole goal economic prosperity, and under the Reserve
Bank Act it's looking for price stability and full employment.
They're both as important as each other. Been a lot
of debating in recent years. They don't care about full employment.
They don't care about price stability. That's not true. I
mean we've had full employment, so they certainly haven't failed
on that. But what the Reserve Bank of Michelle book
(02:29):
the government has said is that price stability at this point,
up until now, but maybe not going forward, but up
until now, price stability has been the most important of
those two things understood. Essentially just manages the trade off
between growth, employment and inflation. It's also responsible officially for
financial stability, so things like run on banks and making
(02:50):
sure money flows through the economy properly. The reserve banks
responsible for that. So monetary policy is also supposed to
look after financial stability.
Speaker 2 (02:59):
So they all get in.
Speaker 3 (03:00):
A room, God doess a lot, have a power chat
about employment, chat about inflation, chat about economic growth. They say, oh,
we might lift interest rates today because we need to
slow down economic growth and we worry about inflation. Or
they might say we wouldn't mind cutting interest rates because
we aren't so worried about inflation and we need to
boost economic growth. What is not unique in Australia, but
(03:25):
certainly a benefit of our system is that the Reserve
Bank is independent of government.
Speaker 2 (03:28):
It can do that.
Speaker 3 (03:30):
Without any favor or fear of retribution from government. So
the big debate in the US is Donald Trump putting
pressure on their central bank, the US Federal Reserve. About that, now,
the guy who's running down, a guy called J. Powell,
is pretty determined to filler, and he is determined to
be independent. And he's one of the great things about
(03:50):
modern democracies that their central banks are independent.
Speaker 1 (03:56):
Okay, all right. If there is a lot in all
of that, right, boil it down too. At its essence,
what is going to affect me most of all is
interest rates. Right, So the single most important factor affecting
(04:16):
interest rates inflation.
Speaker 3 (04:18):
It depends where we are in the cycle. It has
been inflation for the last few years, without a doubt.
What we've heard from Reserve Bank is then now worried
about economic growth and economic growth slash full employment. If
you have slow growth, you are likely to get a
tick up in the labor market. Hasn't really happened yet,
but that's what people think. So I think going forward,
(04:39):
the Reserve Bank's going to talk more about economic growth
and full employment. Previously it's all been about inflation.
Speaker 1 (04:44):
Okay, all right, let's take that as all understood, right.
Speaker 3 (04:50):
Don't laugh, BA think about economics is you just assume
away anything is just a bit tricky.
Speaker 2 (04:55):
Just pretend we know about you're assuming we understand that,
and hopefully.
Speaker 1 (04:58):
There won't be a quiz at the end. Who makes
these decisions? Who are who are the actual people behind
behind all of this because at the end they at
the end of the day, they are just people trying
to take in a huge amount of information and make
decisions that can change the course of the Australian economy.
Speaker 3 (05:16):
Yes, so there was a change to the Reserve Bank
last year. We ended up now this year we ended
up with a Monetary Policy Board. The Montary Policy Board
has the Governor, a woman called Michelle Bullock, the Deputy
Governor Andrew Housen from his British guy, the Secretary to
the Treasury, and then sit in the Secretary to the Treasuries,
(05:38):
the guy called seven Kennedy, and then six non executive
members basically business leaders. So Marnie Baker, she's been on
the show. He used to run Ben Benning on Adelaide Bank.
She's one of those six people. In harp Overy, well known,
highly credentialed academic Carolyn Hewson Allison Watkins used to run
Coca Colorametal.
Speaker 2 (05:57):
So they're the guys that get in there.
Speaker 3 (05:59):
There is irbank boffins come in and say this is
what we think is happening, put up a lot of charts,
you know, chat about the weather, do whatever.
Speaker 2 (06:06):
At the end of it, the Reserve Bank.
Speaker 3 (06:07):
Probably comes down with I'm sure they would come out
with a recommendation based on what the chief economists of
the Reserve Bank says, a woman called Sarah Hunter, and
then the members vote on it.
Speaker 2 (06:18):
It has doesn't have to be a unanimous decision. It
has to be a majority of decision.
Speaker 1 (06:21):
How important is it that there are those business leaders
part of this decision because of that real world experience
beyond the walls of the Reserve Bank.
Speaker 3 (06:29):
So the Reserve Bank would argue that they've got these
great business liaison programs going on, so they know what's
going on.
Speaker 1 (06:35):
The way you said that suggests that you don't necessarily agree.
Speaker 3 (06:38):
They have worked at the Reserve Bank, and I know,
I mean, I know Michelle Bullock, I don't know Andrew Howser,
but I know a bunch of their leaders and they
had their lifelong Reserve bankers. So I think having people
from outside coming in and saying what they're you know,
seeing in real life is a really really good idea.
Speaker 1 (06:58):
Okay, especially someone like maney Aker who has worked at
a bank and has seen mortgages in action and the
impact of interest rates going up and down on real
world customers.
Speaker 2 (07:09):
Yeah, absolutely, okay, I.
Speaker 1 (07:13):
Think I mean, you exceeded the five minute time limit, sorry,
just marginally, And that might have might have been also
because of my contribution. If it had just if we
just cut me out and just focused on you, you were
probably within the five minutes. I think we've answered the
question out considering it was a three part question, and
it also led to the remarkable image of the Reserve
(07:33):
Bank as a as a trident kind of no, no,
you disagree with that?
Speaker 2 (07:39):
Oh no, no, we can go with that.
Speaker 1 (07:41):
I pickedure the Little Mermaid, you know, and King Triton
with his trident. You remember that, it's very.
Speaker 2 (07:48):
An obscure reference when it comes to the Reserve Bank.
Speaker 1 (07:50):
There, I'm trying to put it in terms that I
will remember and I will forever. Now remember those three
goals of the Reserve Bank, and I will use them
little Mermaid to do so.
Speaker 2 (07:58):
All right, Thank you very much, Sean, Thank you Michael.
Speaker 1 (08:00):
Remember if you've got your own question that you would
like us to answer them, please send it on through
via the website Fearangreed dot com dot au or jump
onto any of the social media platforms and we will
pop it on the list our Michael Thompson and this
is ask Fear and Great
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