Lowe: Neutral Rate at Least 2.50%

"In considering the outlook for interest rates at its most recent meeting, the Board had an extended discussion of the neutral real interest rate."

• "The concept of the neutral real interest rate is a useful one – it is the real interest rate that is neither stimulatory nor contractionary. From a practical perspective, though, one of the challenges that we face is that the neutral real interest rate cannot be observed or measured directly. It must be estimated or inferred from other information. The staff at the RBA use a wide range of models and techniques to do this."
• "These models produce a range of estimates and the estimates change through time as more information becomes available. This means that there is considerable uncertainty around any particular estimate of the neutral real rate. Having said that, most approaches suggest that the neutral real rate for Australia is at least positive."
• "A related challenge is that the Board needs to translate any estimate of the neutral real rate into an estimate of the neutral nominal rate, as the Board sets the nominal cash rate, not the real cash rate. This translation requires an estimate of expected inflation. If we take the 2½ per cent midpoint of the inflation target as a reasonable estimate of medium-term inflation expectations, this suggests that the neutral nominal rate is at least 2½ per cent. It would be higher than this if medium-term inflation expectations were to shift higher."
• "I want to emphasise that the concept of the neutral rate is no more than one reference point for the Board. It is not the basis of a mechanical rule and we are not on a pre-set path to achieve any specific level of the cash rate. Rather, the Board will continue to be guided by the incoming evidence and by its assessment of the outlook for inflation and the labour market. It is determined to do what is necessary to return inflation to 2–3 per cent."