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Minutes: Cash Rate "Well Below" Lower Estimates Of Neutral

RBA
"Members noted that gauging the level of the neutral rate is challenging in practice because it cannot be directly observed and must instead be inferred from the data. The staff apply a range of methods for estimating the neutral rate, each with its own advantages and disadvantages, and each method produces a different estimate. The range of estimates is wide."
  • Members also observed that the cash rate is set in nominal terms, while the neutral rate is defined in real terms." "Translating estimates of the neutral rate to a nominal interest rate involves adding inflation expectations. Like the neutral rate, economy-wide expectations for inflation cannot be directly observed and must be inferred from the data, adding an additional layer of uncertainty. Members observed that estimates of the nominal neutral rate were above the cash rate in the decade prior to the pandemic. This was a period when inflation was low, and potentially indicated limitations of the framework as a benchmark for the stance of policy."
  • "In the context of the significant degree of uncertainty about estimates of the neutral rate and the limitations of the framework, members discussed three points. The first was that the current level of the cash rate is well below the lower range of estimates for the nominal neutral rate. This suggests that further increases in interest rate will be needed to return inflation to the target over time. The second was that the neutral rate framework indicates that if inflation expectations rise, the level of nominal interest rates required to return inflation to the target will be higher than otherwise. And the third was that the neutral rate framework provides only a general guide and any specific estimates need to be treated with caution."
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
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MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
BulletMarketsFixed Income BulletsForeign Exchange BulletsHomepage

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