Kent points to rising neutral rates as Australia weighs monetary restraint
Australia’s Christopher Kent sees evidence that neutral interest rates are rising, complicating judgments about how strongly monetary policy restrains the economy. At a Sydney conference, the Reserve Bank official said rate changes still work through savings, borrowing, asset values and the exchange rate. The neutral rate remains uncertain, and his remarks did not announce a new rate decision.
Economics & Markets··Morning
A rising neutral rate complicates the policy assessment
Christopher Kent, the Reserve Bank of Australia’s assistant governor for financial markets, said there was reasonable evidence that neutral interest rates were rising in Australia and abroad. He spoke at Commonwealth Bank’s Global Markets Conference in Sydney on October 19. The neutral rate is the theoretical interest rate that neither stimulates nor restrains the economy; it cannot be observed directly.[1], [2]
Kent said the cash rate and its expected path were near the upper end of the central bank’s range of central neutral-rate estimates. That gave some confidence that policy was restrictive, while leaving open whether it was restrictive enough. He described the estimates as uncertain. The assessment concerned the effect of existing policy rather than announcing a new interest-rate decision.[2]
Savings and the exchange rate transmit higher rates
Kent said the main channels through which interest rates influence the economy continued to work. Higher rates can encourage saving and faster debt repayment, affect housing and household wealth, and influence the exchange rate. He rejected the idea that monetary policy’s effectiveness had changed dramatically, while stressing that the immediate impact on mortgage repayments captures only part of its operation.[2]
Savings held against mortgages in offset and redraw accounts can soften the immediate cash-flow pressure on some households. Kent described those balances as buffers built partly for that purpose, with net household debt lower and more stable than gross borrowing suggests. A stronger Australian dollar can also lower the local-currency cost of imports, including fuel, through the exchange-rate channel.[2]
Investment forces and policy lags pull in different directions
Investment in artificial-intelligence infrastructure and government spending can put upward pressure on neutral rates, Kent said. Ageing populations and longer-term productivity developments can work in the other direction. AAP’s account also reported his distinction between neutral rates and the extra yield investors demand to hold longer-term debt: a higher term premium can tighten financial conditions for a given cash rate.[1], [2]
Housing credit, prices, turnover and forward indicators for dwelling investment have softened, while business credit remains strong beyond data centres, Kent said. Monetary policy also works with long and variable lags. The central bank uses models and watches the early stages of transmission to judge how much earlier rate changes are still working through the economy.[2]
