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Analysis

Real policy interest rates

by Gabriel Stein

Mon 14 Apr 2014

Real policy interest rates Enlarge Chart loading Image

What the chart shows: The chart shows the average of central bank policy rates, deflated by the headline CPI, for a number of countries.

Why the chart is important: The current message from the most important central banks is that interest rates will remain low for long. In tandem with this, there is also some discussion about ‘neutral’ interest rates and what these are. Much of this discussion is couched in nominal terms. That is a mistake. A ‘neutral’ interest rate when inflation is 2% is not the same as one when it is 1% or 3%. ‘Neutral’ interest rates must be defined in real terms. Broadly speaking, neutral interest rates can be defined as the long-term policy rate, deflated by the consumer price index. Obviously, much depends on which period is chosen for the ‘long term’. However, what is clear is that post-crisis real policy interest rates are extremely low by historical standards. This also means that central banks, notably the Federal Reserve and the Bank of England, could afford to implement a symbolic policy rate rise – to show that interest rate must eventually be normalised – while at the same time fulfilling their promise to keep interest rates low.

Chart and comments provided by Oxford Economics www.oxfordeconomics.com