If markets are weakly integrated, the central bank’s interest rate signals will not have the desired impact on other short and long-term interest rates, the exchange rate and other asset prices. In such a scenario, the central bank would need to act in various segments of the market to achieve the desired objectives.
For example, the impact of an OCR tightening cycle may be very different depending on the starting levels of household and corporate debt and debt servicing capacity. When are monetary policy adjustments likely to be helpful from a financial stability perspective?