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Source: Bank for International Settlements

Introduction

In a world of unconventional policies, assessing the stance of monetary policy is not as straight forward as it once was.

It used to be that looking at the Board’s cash rate target, and coming to a view on its likely path (for example by using overnight indexed swap (OIS) market prices), provided a reasonable summary of the stance of monetary policy. If the cash rate target was lowered, the traded cash rate would decline to that lower rate and policy had clearly moved to a more expansionary footing.

The mechanics of the first stage of monetary transmission was also well understood. The cash rate anchored very short term interest rates. Along with expectations of the future evolution of the cash rate, this influenced rates out along the (risk-free) yield curve. This in turn affected rates on corporate bonds, mortgages and other financial products that reference different points along the yield curve. Key asset prices – such as the exchange rate and equity prices – also reacted to changes in the yield curve.

So using the cash rate target as a summary statistic was a reasonable way to think about the stance of policy, and the transmission mechanism to financial prices was clear.

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