The interest rate cut that wasn't

The Reserve Bank looks set to cut rates to the some of the lowest levels in 50 years. But recent cuts have simply kept up with moderating inflation, and credit conditions aren't as easy as the cash rate may suggest.

The interest rate that matters is the real, or inflation-adjusted interest rate. In real terms, the official cash rate is not especially low relative to historical experience. Recent cuts in official rates have simply kept pace with a moderating rate of inflation to keep the real interest rate broadly steady.

The nominal cash rate must move by more than the change in the inflation rate for monetary policy to have the desired influence on the economy.


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