Neutral interest rates could be lower than you think

Predictions from some forecasters that interest rates are set to rise to 5% or above in the current cycle are based at least in part on the assumption that the Monetary Policy Committee will want to raise interest rates back up to a “neutral” level from their current stimulatory level. With real interest rates averaging close to 3% over the long term and inflation expectations close to the 2.5% RPIX target, neutral rates would appear to be around the 5.5% level.