speech channels of transmission christopher kent [ * ] assistant governor ( financial markets ) address to bloomberg sydney – 11 october 2023 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. my talk today will focus on how monetary policy moves through the economy in three steps – from the cash rate to a broad range of interest rates, from those rates to economic activity and from economic activity to inflation. i will discuss the five main channels of monetary policy and the impact these are having in australia to bring down inflation. step 1 : from the cash rate to other interest rates the cash rate is the interest rate paid by banks that borrow from other banks in the overnight market. it is closely linked to other interest rates throughout the economy. when banks borrow at slightly longer terms – of say a month – they pay a similar rate of interest ( to what they expect the cash rate to be over that time ). if they faced a much higher rate, they would be better off borrowing overnight in the cash market and rolling that each day for the month. going the other way, banks can

the source was strong productivity growth, as is evident from the relatively steep slope of the blue line. over these years, we benefited from a noticeable pick - up in productivity growth, partly due to a period of substantial economic reform. however, the story over the past decade is quite different, with productivity growth being noticeably slower. 1 the good news is that this did not lead to slower growth in our living standards ( this is apparent in the two lines moving apart gradually ). the reason for this is the very substantial increase in australia ’ s terms of trade over this period. with rapid growth in asia pushing up the prices of commodities, australia ’ s export prices increased substantially relative to our import prices. as glenn stevens has pointed out, over time we have been able to buy more and more flat screen televisions for each ton of iron ore that we have sold overseas. 2 it is this increase in the average value of what we produce per hour of work – not so much an increase in the average amount that we produce per hour – that has been central to the increase in our living standards over the past decade. before i discuss the implications of this, i would like to add one further line to this graph ( graph 2 ). this third line shows how real income per capita ( the orange line ) – as opposed to per hour worked – has increased over time. as you can see, the rise in real income per capita has been even faster than the rise in real income per hour worked, which has been faster than the rise in productivity. since 1993, average real income per capita has increased by almost 70 per cent, or nearly 2¾ per cent per year on average. again, this is much faster than we experienced in earlier decades and faster than in other advanced economies ( graph 3 ). by way of comparison, over this same period, there has been a cumulative increase in real income per capita across the g7 economies of just 28 per cent, or around just 1¼ per cent per year on average. the slowdown in productivity growth is discussed in d ’ arcy p and l gustafsson ( 2012 ), “ australia ’ s productivity performance and real incomes ”, rba bulletin, june, pp 23 – 36, and connolly e and l gustafsson ( forthcoming ), “ australian productivity growth : trends and determinants ”, australian economic review, december 2013. see stevens g ( 2010 ), “ the challenge of prosperity ”, address to the committee for