The RBA identifies four main transmission channels in its April 2025 Bulletin article on monetary policy transmission through the lens of its MARTIN and DINGO models (Mulqueeney, Ballantyne and Hambur 2025). Christopher Kent, as Assistant Governor (Financial Markets), added a fifth – the credit channel – in his October 2023 address to Bloomberg. These aren't exhaustive, but they're ones the RBA can quantify in its models. I'll come back to some others later.
The textbook story of monetary policy is deceptively simple: raise rates to cool inflation, cut rates to stimulate demand. In practice, the transmission mechanism is neither symmetric nor uniform. Different channels operate at different speeds, rate hikes bite harder and faster than rate cuts heal, and the labour market – the variable central bankers care most about – is the slowest to respond. Understanding this structure explains both why central banks should be deliberate in their actions, and why a rapidly falling unemployment rate during above-band inflation is one of the most worrying signals in macroeconomics.
The NAIRU – the non-accelerating inflation rate of unemployment – is back at the centre of the Australian monetary policy debate. With the RBA hiking in February and the next meeting in mid-March, the question isn't really about the direction of policy anymore. It's about pace. Should the RBA hike again in March, or wait for the Q1 quarterly data and (depending on that data) act in May?
The answer depends almost entirely on where you think the NAIRU sits.
