Anna Seim: Neutral interest rate – meaning, limitations and assessment

Speech by Ms Anna Seim, Deputy Governor of the Sveriges Riksbank, at a seminar on "Neutral interest rate – meaning, limitations and assessment", organised by the Sveriges Riksbank, Stockholm, 26 November 2024.

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

Presentation accompanying the speech

It is now just over six months since I joined the Executive Board of the Riksbank. It was with great humility that I made the move from academia to practical economic policy-making. One factor that greatly facilitated the transition was that the principles of how best to design monetary policy are strongly anchored in research.

Today's seminar will focus on a theoretical concept that is firmly rooted in research but also has great practical significance − the neutral interest rate. The neutral interest rate is a concept I have of course considered in my previous role as a researcher, for example when I, together with Lars Calmfors and John Hassler, wrote an ESO report on the interaction between fiscal and monetary policy a couple of years ago.1 We then developed measures of whether economic policy had been countercyclical, i.e. contractionary in an upturn and stimulative in a downturn. At that time, estimates of the neutral interest rate were necessary as a reference point. But never before have I had so much reason to ponder the importance of the neutral interest rate as in recent months.

I will start by discussing the concept of the neutral interest rate, how it relates to other similar concepts, what factors influence it, why it is important for a central bank and what its limitations are as a benchmark for practical monetary policy. I will conclude by presenting the Riksbank's updated assessment of the neutral interest rate.