RBA Ellis: Models Show Real Neutral Rate Just Under 1%

• Published on
• 12 Oct 2022, 09:01 AM

By Sophia Rodrigues

(Sydney, October 12, 2022)—Australia’s neutral real rate is just under 1 per cent, based on the average of the nine models used by the Reserve Bank, assistant governor Luci Ellis said Wednesday.

Ellis made the comments in a speech at the Citigroup conference titled, “The Neutral Rate: The Pole-Star Casts Faint Light.”

The RBA uses nine different models to estimate neutral rate derived from three broad approaches, and the range showed by them is -0.5% to 2%, with the average just under 1%, Ellis said.

But the estimate of neutral rate doesn’t mean that in the current cycle the RBA is using it as a mechanistic approach of “we have to get back to neutral”, or above neutral.

“The neutral rate is an important guide rail for thinking about the effect policy might be having. It is not necessarily a prescription for what policy should do,” Ellis said.

This means “neutral” is not a destination the RBA will necessarily reach but more a pole-star to guide it.

The RBA makes a holistic assessment of the forces that are affecting the economy and whether they might be reinforcing or offsetting the impact of monetary policy.

“It isn’t a simple mapping from inflation forecast to desired policy stance,” Ellis said.

A real neutral rate of just under 1%, translates to nominal cash rate of just under 3.5% using the mid-point of the RBA's 2% to 3% inflation target.

--Contact: Sophia@centralbankintel.com