Christopher Kent: Channels of transmission

Address by Mr Christopher Kent, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, to Bloomberg, Sydney, 11 October 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

I want to thank Bloomberg for organising this event. It's great to be back at this venue.

Since May 2022, the Reserve Bank has raised the cash rate target by 400 basis points with the goal of bringing inflation back into its target range of 2–3 per cent. Tighter monetary policy is working to slow the growth of demand and bring it into better balance with supply. This is contributing to the decline in inflation.

Today I want to show how increases in the Bank's cash rate target are transmitting through to demand and inflation. The most well-known element is the cash-flow channel, whereby a rise in the cash rate leads to higher interest payments for those who have debt, reducing the income borrowers have to spend on other things, leading to slower growth of demand and ultimately a decline in inflation.

The cash-flow channel is felt with immediacy by borrowers with variable-rate debt and then with a lag for those with fixed-rate debt. It is this channel that is being felt most keenly at present, with many indebted households and businesses experiencing a painful squeeze on their finances. While this burden falls on only part of the population, there are other channels of monetary policy that spread across a broader range of people. Indeed, in economies such as the United States where a sizeable share of borrowing – particularly mortgages – is at rates fixed over very long periods, these other channels of monetary policy do most of the heavy lifting.