Thomas Jordan, Swiss National Bank Governor, Keynote Speech at Bank of Korea Conference
'Natural Interest Rate as a Benchmark for Monetary Policy from the Perspective of Policy Practitioners'
Argues It Is Too Early to Judge Whether Neutral Interest Rate Has Risen
Amid active global discussions on adjustments to the neutral interest rate, claims have emerged that it is still too early to determine whether the neutral interest rate is rising.
Thomas Jordan, President of the Swiss National Bank, made this remark during his keynote speech titled "The Natural Interest Rate as a Benchmark for Monetary Policy from the Perspective of Policy Practitioners" at the 'BOK International Conference' held on the morning of the 30th at the Bank of Korea Conference Hall in Jung-gu, Seoul.
President Jordan noted that interest has been growing regarding whether the natural interest rate (neutral interest rate) will rise or return to the low levels seen before the pandemic, as real interest rates (nominal interest rate minus inflation rate) have increased due to tightening monetary policies in major countries following the COVID-19 pandemic.
The neutral interest rate refers to the appropriate interest rate level that can achieve economic growth at the potential growth rate without overheating or recession. It also plays an important role in central banks' decisions on benchmark interest rates.
President Jordan explained, "Over the past 40 years, real interest rates in major countries have continuously declined, falling to slightly below 0% after the global financial crisis, and then rising to slightly above zero interest rates in the past two years following the COVID-19 pandemic."
The long-term downward trend in real interest rates is attributed to factors such as a decline in potential growth rates, increased savings for retirement, and rising demand for safe assets. Conversely, the recent two-year increase in real interest rates is mainly due to tightening monetary policies in response to high inflation in major countries.
He emphasized, "The rebound in real interest rates over the past two years has also sparked debate on whether the neutral interest rate is structurally rising or will revert to the low levels seen before the pandemic."
He continued, "It is still too early to determine whether the neutral interest rate is rising again. This is because factors that lower real interest rates, such as low potential growth rates and increased life expectancy, coexist with factors that raise real interest rates, including a decline in savings rates due to an increase in the non-working population, large fiscal deficits, productivity improvements from new technologies, and large-scale investments related to the green transition."
He further argued, "Since the neutral interest rate functions as an important benchmark for evaluating the stance of monetary policy, it is crucial to accurately predict its direction of change and understand its structural determinants." However, he also noted, "The neutral interest rate is unobservable and must be estimated through various data and models, so its estimation inherently involves considerable uncertainty."
To overcome the uncertainty in estimation and utilize the neutral interest rate in policy, he stated that deriving a reliable estimate of the neutral interest rate is important. A reliable estimate should not be mechanically averaged from various model estimates but should also be based on expert judgment that can assess the impact of structural factors not captured within the models.
He added that while a reliable neutral interest rate can be usefully applied to long-term assessments of monetary policy stance and evaluations of inflation outlook and pressures, it is important to note that short-term changes in monetary conditions can be explained solely by changes in real interest rates, independent of the neutral interest rate.
President Jordan said, "When utilizing a reliable neutral interest rate in monetary policy, it is advisable to keep open the possibility that the figure may be underestimated or overestimated and to pursue a robust monetary policy strategy under various scenarios." He added, "If the neutral interest rate is underestimated or overestimated, inflation risks of rising or falling may materialize under a given interest rate path, so it is best to prepare for all possible paths."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
