Reserve Bank of Australia Annual Report – 2006 Governor's Foreword

The Reserve Bank's activities in 2005/06 took place against a background of a strong global economy, where central banks around the world were gradually moving interest rates up to more normal levels. Although world inflation is still relatively low, it has been increasing, as have yields on marketable securities. In Australia, output growth picked up after a small slowing in the second half of 2005 and inflation moved up gradually. There was one tightening of monetary policy during the financial year – a 25 basis point rise in the cash rate in May, followed by another in August 2006.

The developments in monetary policy during the year have been explained thoroughly in the quarterly Statement on Monetary Policy, testimony before the House of Representatives Standing Committee on Economics, Finance and Public Administration, media releases and speeches by senior officers. The other main policy responsibility of the Reserve Bank is to contribute to the stability of the financial system. The part of this work that is directed to the payments system is detailed in the Annual Report of the Payments System Board and in media releases. The work that is directed at financial stability itself is covered in the twice-yearly Financial Stability Review, which is presented to the Council of Financial Regulators before being released to the public. For these reasons, the Annual Report has for some years now concentrated on giving an account of the other activities of the Reserve Bank during the year, as well as presenting the financial statements. Among the various activities that occurred during the year, the following are worthy of mention.

Domestic money market operations were, as usual, aimed at maintaining the cash rate at the target level set by the Board. The task of achieving it is a daily one involving large sales and purchases of securities outright and under repurchase agreements. In international operations, the main tasks were the investment of international reserves and the provision of foreign exchange for the Government. No outright foreign exchange intervention was undertaken, but reserves were replenished by a further $2.3 billion. Management of the Reserve Bank's balance sheet has become a larger job as its size has grown: total assets now exceed $100 billion, compared with $58 billion five years ago.

International economic relations continued to be an important priority and one that is using more resources as Australia becomes an important member of international bodies, particularly the G-20 and the Financial Stability Forum, which were both formed after the Asian crisis. During 2005/06, the Reserve Bank and the Treasury hosted two meetings for the G-20, and will host the annual G-20 Meeting of Finance Ministers and Central Bank Governors in November 2006 in Melbourne. The Reserve Bank also hosted the March 2006 meeting of the Financial Stability Forum in Sydney. Australia has been a prominent member of both bodies and plays a larger role there than in the older economic forums such as the IMF and OECD. The Reserve Bank continued to participate actively in the work of the Bank for International Settlements, including hosting a conference on reserves management in October 2005 and a conference of central bank auditors in December 2005, both held in Sydney.

In order to operate its regular services such as the wholesale payments system, transactional banking services for the Government and the issue of currency notes, the Reserve Bank regularly updates its systems. There has been a major upgrade of the RITS system, so that participants in the wholesale payments system can now use a more accessible browser-based interface. Work also proceeded with the construction of a business recovery site at Norwest Business Park in Sydney, which is expected to be operational in mid 2007. A new process to ensure that the quality of lower-denomination currency notes is maintained has been developed. It provides incentives to ensure that banks and armoured car companies return old notes, including from remote areas, for processing and replacement. In November 2005, the opportunity was taken to auction the Reserve Bank's holdings of gold coins. These had been accumulated during the Second World War and served no useful purpose on our balance sheet. They really belong in the hands of collectors, as the successful auction results showed.

Note Printing Australia produced its four billionth polymer note in April 2006. It has now printed 51 denominations for 18 countries. During the year, nine new denominations were launched on polymer by Note Printing Australia and other banknote printers for Romania, Papua New Guinea, Singapore and Vietnam. Securency, the producer of polymer substrate, in which the Reserve Bank has a 50 per cent share, is operating at full capacity and its profits have exceeded budget for the past two years. It is in the process of constructing a new building at Craigieburn, Victoria, to more than double its capacity.

The completion of the 2005/06 financial year almost brings my term as Governor to a close, and this Annual Report is the last to which I will be contributing. It is thus a fitting vehicle for me to express my thanks to the staff of the Reserve Bank for the dedicated and professional job they have done. They have not only carried out their present responsibilities cheerfully and efficiently, but have actively sought to identify potential future problems and put in place systems to prevent them. I thank them, not only for making my job easier, but for the contribution they have made to the economic success of Australia over many years. I would also like to record my thanks for the support I have received from members of the Reserve Bank Board, who in every instance have put the national interest above any sectional interest.

IJ Macfarlane
Chairman, Reserve Bank Board
16 August 2006