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Where is neutral? Where will rates eventually settle?

BOE
  • Bailey: We don't spend time discussing the equilibrium rate of interest. It underpins the system but its not a useful guide for setting policy. The peak of expected rates over the next few years has come down and that has reduced mortgage rates.
  • Broadbent: Very difficult to assess neutral rate in real time. In saying policy is restrictive we think above that rate, but have inferred that from what we are seeing in the economy, rather than thinking we are above some specific number. Refers to NY Fed research that shows short-term and long-term neutral rates have been stable for around 60-years but over the past three years they have diverged. That shows the uncertainty. Can be confident we are above the neutral rate of interest (and that rates are restrictive) without knowing where the neutral rate is.
  • Ramsden: Notes that mortgage rates have come off as reference rates have come down. Also seeing savings rates coming down - refers to chart 2.6 in the MPR - and that shows instant access rates are still rising. That may be linked to the FCA's action plan on savings, particularly as the rate on instant access savings seems to be picking up.
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