CANBERRA: For Australian central bank watchers, it seems no one is neutral on where neutral actually is. Economists and money markets are betting the point at which interest rates are neither stimulative or restraining is lower than the central bank’s estimate of about 3.5 per cent.
And if markets and analysts are right, that means there’s less stimulus in the economy than the Reserve Bank of Australia thinks, even before factoring in the tightening effect of a rampaging currency. While the board will likely leave its official cash rate unchanged at a record-low 1.5 per cent on Tuesday, the release of the neutral estimate almost two weeks ago sent the Aussie dollar soaring in the belief policy makers were laying the ground to tighten. It was only after deputy governor Guy Debelle and governor Philip Lowe used speeches to dismiss the significance of the rate’s inclusion in the July minutes that the frenzy briefly eased.
The RBA estimated the neutral cash rate at 3.5 per cent: equivalent to a real rate of 1 per cent plus the 2.5 per cent midpoint of its inflation target. But it’s notable that CPI hasn’t reached that midpoint since mid-2014; indeed five-year inflation swaps show 2 per cent is a more realistic average for inflation, which would provide a neutral rate of 3 per cent. The median of 10 economists surveyed by Bloomberg was similarly 3 per cent.
