AI could raise the RBA’s neutral interest rate level

Artificial intelligence could raise Australia’s neutral interest rate level and make it harder for the Reserve Bank to cut interest rates further.

The fate of the neutral interest rate – the level of interest rates that neither slows nor speeds up the economy – is a much-debated topic as traders speculate about when the central bank will end its easing cycle.

Speaking on Wednesday, RBA head of international department Penelope Smith said that while global neutral rates had been gradually falling until the COVID-19 pandemic, several estimates suggested the neutral rate had remained stable or increased since then.

“Taking it all together leads to a somewhat unsatisfactory conclusion: there is a lot of uncertainty about where neutral interest rates are and where they are going,” said Dr. Smith at the Australian Securitization Conference in Sydney.

“However, we can perhaps conclude that they have not decreased since the pandemic and may even have increased.”