For lower interest rates, the opposite is true. Of course, this is simple but not easy. Underlying the relationship are complex transmission mechanisms that link the level of interest rates to inflation and employment. The Reserve Bank’s Monetary Policy Handbook provides a stylised guide to the monetary policy transmission mechanism.
6 Figure 1 provides a walk-through of the five main channels from shifting the OCR through to employment and inflation. These channels are savings and investment decisions; cash-flow access; asset prices and wealth; the NZ dollar exchange rate; and inflation expectations.