Monetary Policy Transmission Mechanism

Monetary policy operates through short-term interest rates to achieve its ultimate objective of price stability. The level and direction of interest rates is influenced through liquidity management and its signalling impact. A change in policy rate will trigger a chain of events that affect the whole range of market rates. The transmission of monetary policy is through the money market to the financial system by the price and quantity effects. The two key channels for the transmission of monetary policy are open market operations and the interbank rate. Stability in the money market is an important precondition for the effective transmission of monetary policy. The interbank rates are an important signalling device to the market of monetary policy intentions. The resultan...