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​ Transmission mechanism

 

The impact of monetary policy on inflation incurs a 1-2 year time lag from the announcement of the policy rate decision.  Transmission follows 5 main channels including:

 

1. Interest rate channel

2. Credit channel

3. Asset price channel

4. Exchange rate channel

5. Expectations channel

 

Through these channels, adjustments in consumption and investment would take place and ultimately affect production and inflation.​

Change_Policy__engl.png
​​​

​

Channel 
 

Asset price channel 

When the central bank decides to decrease the policy rate, adjustments in short-term money market rates occur.  People then reallocate their savings towards non-interest bearing assets such as real estate and equity.  A rise in demand for these assets results in higher prices.  As a result, wealth increases and higher consumption follows.  Moreover, higher equity prices also increase market value of firms, thus making it more worthwhile to invest.  Ultimately, an expansion in domestic demand would lead to higher economic growth.

 

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