Commonwealth Bank senior economist Trent Saunders has indicated that Australia’s neutral cash rate has been revised upwards, suggesting that current monetary policy is less restrictive than previously assumed. Saunders’ updated estimate puts the neutral rate at 3.6 per cent, aligning with the Reserve Bank of Australia’s (RBA) revised range of 3 to 4.2 per cent. This implies that the RBA’s existing cash rate, while above neutral, is only moderately restrictive. Commonwealth Bank is one of Australia’s largest banks, providing a wide range of financial services to individuals, businesses, and institutions. The bank offers deposit accounts, loans, credit cards, investment products, and wealth management services.
The upward revision is attributed to stronger-than-expected inflation readings and robust economic activity observed over the last five months. Saunders noted that the neutral rate is a dynamic benchmark, subject to recalibration as new economic data becomes available, acknowledging the inherent uncertainty in its estimation. The nominal neutral rate represents the level at which the cash rate neither stimulates nor restrains economic activity.
According to Saunders, the neutral rate is where monetary policy would ideally settle if inflation were tracking towards the midpoint of the RBA’s target band and economic growth were in line with its potential. A cash rate below the neutral rate would support economic activity, while a rate above it would act as a constraint.
Market pricing also supports the assessment of a higher neutral rate, with 5- and 10-year risk-neutral Treasury yields hovering just below 4 per cent, a notable increase from approximately 3.5 per cent in October 2023. Both economic models and market indicators suggest that the RBA’s policy stance may be less restrictive than previously perceived.
