RBNZ clarifies New Zealand’s neutral interest rate

New estimates set neutral rate amid high inflation

RBNZ clarifies New Zealand’s neutral interest rate

The Reserve Bank (RBNZ) has released a Bulletin article that delves into how the neutral interest rate (NIR) is estimated and its significance in economic modelling and policy decision-making.

Current estimates vs. actual rates

According to the RBNZ’s new Bulletin article, the neutral OCR would need to be around 3.9% to stabilise the economy without accelerating or slowing it down. This contrasts sharply with the current OCR of 5.5%, which is actively being used to mitigate inflation and ease capacity pressures within the economy.

Adjusting for inflation expectations

The calculation of the real NIR, adjusted for inflation expectations, is crucial for effective monetary policy.

“While our indicator suite suggests a long-term NIR of around 2.5%, interest rates currently need to be substantially higher in the short- to medium-term to exert downwards pressure on economic activity,” the RBNZ Bulletin reported.

Challenges in estimating the NIR

The process of determining the NIR involves a blend of different methodologies and expert judgments.

“The conceptual complexity and inherent uncertainty in estimating the NIR means we cannot rely on any single estimate of the NIR for New Zealand,” said Andre Castaing and Marea Sing (pictured above, left to right), Bulletin authors.

Castain and Sing emphasised that a simple average of these estimates aids their forecasting and modelling, but different scenarios may require different approaches.

The role of the OCR

With the OCR currently set above the estimated neutral rate, it plays a crucial role in controlling inflation dynamics in New Zealand, aligning short-term economic needs with long-term stability goals.

For the RBNZ media release, click here.

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