When the central bank decides to decrease the policy rate, adjustments in short-term money market rates occur.  Given that prices are sticky, real interest rates (i.e. inflation adjusted nominal interest rates decline firstly in the short-run then in the long-run, in line with the term structure.)  Part of these adjustments can be explained through portfolio management of financial institutions in order to maintain competitiveness and generate profit and ultimately result in a decline in deposit and lending rates.

From above, a decline in real interest rate lowers the opportunity cost in consumption and investment causing private domestic demand to expand.  Subsequently, the economy grows at a higher pace and inflationary pressures increase.

This channel of transmission can also be explained through price level expectations since an accommodative monetary policy stance also leads to higher price level and inflation expectations.  As a result, real interest rates decline and higher economic growth is achieved as above.