This is known as the wealth channel, which appears important in the Australian context. The balance sheet channel is closely related. Rising net worth makes it easier to borrow, with higher collateral values making lending a less risky proposition. The cash-flow channel appears to be an important part of the transmission mechanism in Australia. Changes in interest rates affect households’ and businesses’ cash flows.
If they face liquidity or borrowing constraints, an increase in cash flows will typically lead to more spending. 2 For example, a decrease in interest rates lowers interest payments for households with variable-rate mortgages, leaving them with more disposable income to spend.