RDP 9703: The Implementation of Monetary Policy in Australia 5. Concluding Remarks

The move to announcing and explaining changes to the overnight interest rate has brought with it a number of benefits. Market conditions are easier to manage, given that the behaviour of participants is conditioned by the fact that they do not expect the cash rate to move much away from the announced target. Benefits have spread to the wider market, including less day-to-day variability in other interest rates. Pass-through of policy changes into both deposit and lending rates has also quickened, which together with the effect of announcements on expectations, may have contributed to a speeding up of the transmission mechanism. The announcements have also increased the transparency and accountability of monetary policy and helped to promote public understanding of the monetary-policy framework.

The announcement and explanation of movements in official interest rates has not led to increased delays in changing policy, as some had feared. In fact, the changes in operating procedures, together with the adoption of an inflation target, have seen policy become more forward-looking. As the experience of late 1994 illustrates, the Bank has been prepared, when appropriate, to move interest rates in quite large steps and by a relatively large amount in a short period of time. Despite this, movements in interest rates have tended to follow a relatively smooth pattern with a sequence of moves being made in one direction. While a number of factors help explain this pattern, the most plausible explanations centre on the uncertainty that policy-makers face and the costs that would ultimately be incurred if the direction of policy were to be changed too frequently.