Neutral Rate of Interest

The neutral rate of interest, also known as the natural rate of interest, is a monetary policy that supports the economy at full employment with associated price stability while keeping inflation constant. An inferred rate that is neither accommodative nor restrictive, it is an estimated or theoretical rate based on various analyses measured for different time horizons. It is a dynamic rate that varies based on a range of economic and financial market factors, and can inform monetary policy decisions. Estimates of the “shorter-run” neutral rate are typically influenced by nonmonetary drivers of near-term GDP growth such as changes in current fiscal policy. Estimates of the “longer-run” neutral rate are typically influenced by non monetary drivers which reflect more enduring secular factors such as expected medium-term growth in the workforce and the expected rate of increase in labor productivity.