Friday, December 9

Australia’s neutral rate a guide for policy, not a destination -RBA


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SYDNEY — Australia’s neutral interest rate is at least 2.5% but is not the sole determinant of policy which should be driven by changing circumstances in the economy, a top central banker said on Wednesday.

Reserve Bank of Australia (RBA) Assistant Governor Luci Ellis emphasized the neutral rate was a moving target and hard to determine at any stage of time, which limited its usefulness for monetary policy.

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It was also a long-run rate that theoretically keeps growth at trend and inflation constant at target, absent other shocks hitting the economy.

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

Ellis said the real neutral rate was very likely to be positive and, given the RBA had an inflation target of 2-3%, that implied it would be at least 2.5% in Australia.

The concept is important for financial markets as they try to divine where actual rates might be heading. The RBA has already lifted its cash rate by 250 basis points to 2.6%, suggesting it was around neutral.

Now, analysts are wondering how far above neutral and into restrictive territory rates need to go to bring inflation back to the target band.

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Inflation ran at a 21-year high of 6.1% in the June quarter and is thought to have accelerated to around 7% in the September quarter.

That in turn has led markets to wager rates will have to rise to around 4% to contain inflation, while many analysts are forecasting a peak between 2.85% and 3.6%.

Ellis said policy should not use such a mechanistic approach of “we have to get back to neutral, or above neutral.”

“‘Neutral’, then, is not a destination we necessarily reach, but more a pole star to guide us,” said Ellis.

“And even then, its location is sufficiently uncertain that we are perhaps better served by paying more attention to the ground as it shifts beneath our feet than to that faraway pole star.” (Reporting by Wayne Cole in Sydney Editing by Matthew Lewis)



financialpost.com