Thomas Jordan: The natural rate of interest (r*) as a reference point for monetary policy - a practitioner's view

Keynote speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the 2024 Bank of Korea International Conference, Seoul, 30 May 2024. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Ladies and gentlemen

I am delighted to be here today in Seoul to address such a distinguished audience. I would like to thank Governor Rhee for inviting me to give this keynote speech.

The topic of this year's Bank of Korea International Conference – 'The Evolution of the Natural Interest Rate and Its Implications for the Global Economy' – could not have come at a better time. Monetary tightening over the past two years has lifted policy rates and longer-term interest rates from their historical lows. There are reasons to believe that some of the structural drivers of real interest rates have also changed direction in recent years. A lively debate has emerged on whether real interest rates will return to their pre-pandemic levels, or whether they will remain higher because the natural rate of interest, r*, has increased.

Over the past years, r* has become an important reference point for monetary policy. The difference between the real interest rate and r* gives a measure of a central bank's monetary policy stance. Therefore, r* estimates help in evaluating different monetary policy options. However, the measurement of r* is subject to high uncertainty. Today I would like to focus mainly on how policymakers can nevertheless make use of r* estimates in practice.

In the first part of my remarks, I will briefly review the developments in real interest rates over the past decades. I will then turn to the concept of r* itself. In the second part, I will discuss how policymakers can use r* in practice to assess the monetary policy stance, and in particular, how they can deal with the inherent uncertainty in r* estimates. Here I will draw especially on the Swiss National Bank's experience.