Anna Seim: The Riksbank's new assessment of the long-term neutral interest rate
The neutral interest rate is a concept that is central both in research and in the central banking world, and which has begun to be discussed increasingly in Sweden. But what does the term mean and how does the Riksbank view the neutral interest rate? These are questions that Deputy Governor Anna Seim discussed at a breakfast seminar at the Riksbank. Albin Kainelainen, Director General of the National Institute of Economic Research, was also invited to the seminar to give his views.
Date: 26/11/2024 08:30
Speaker: Deputy Governor Anna Seim
Place: The Riksbank
Anna Seim, deputy governor
Ms Seim began by saying that the term neutral interest rate normally refers to the interest rate that has neither an expansionary nor a tightening effect on the economy. The neutral interest rate varies over time and cannot be read off any statistics; one must try to assess where it lies using estimates of models and other relevant information. Assessments of the neutral interest rate are therefore associated with a significant degree of uncertainty.
The neutral interest rate is an important concept in monetary policy, as it provides a reference value that indicates whether the current monetary policy is stimulative or tightening.
“However, because it is difficult to estimate the level of the neutral rate with any greater precision, there are limitations to its practical usefulness. To assess how high the policy rate is in relation to the neutral level, it is therefore important to continuously monitor the effects of the policy on the economy,” said Ms Seim.
Over the years, the Riksbank has communicated a great deal about the neutral interest rate in speeches and reports, but mainly about the trend decline in the neutral interest rate and how this decline affects monetary policy. Ms Seim noted that in recent years, the Riksbank has not said very much about the likely level of the neutral interest rate.
The Riksbank has over the past year reviewed international studies, assessments by other central banks, pricing and surveys from financial markets and estimated various models in the literature on neutral interest rates on Swedish data. Ms Seim presented the Riksbank's assessment based on this analysis: “The long-term neutral interest rate, and thus the long-term normal policy rate, is probably between 1.5 and 3 per cent. This is one percentage point lower than the range the Riksbank published in 2017.
The range reflects the uncertainty that the Riksbank considers to exist in estimates of the neutral interest rate in the long term. The neutral interest rate is thus assumed to remain at historically low levels. This means, for instance, that one cannot rule out the possibility that the policy rate may periodically need to be lowered to levels around zero. In the event of an economic slowdown or deep recession, when inflation is far below the target, a policy rate cut in the order of 1.5 to 3 percentage points is not particularly exceptional, concluded Ms Seim.