Understanding how changes in the cash rate affect economic activity and inflation – so-called monetary policy transmission – is important for the RBA in pursuing its objectives of price stability and full employment. This article explains how the RBA uses its core models of the Australian economy to estimate the overall effects of policy, explore the different channels through which monetary policy transmits, and consider the economic outlook under alternative paths for monetary policy. The findings highlight that: the peak effect of policy is likely to occur after around one to two years; the exchange rate acts as an important transmission channel for policy; housing is a sensitive part of economic activity; and although individual households’ cashflow can be sensitive to changes in the cash rate, in aggregate it plays a smaller role in transmission.