Central bank chiefs highlight natural interest rate in monetary policy

Chiefs from South Korea and Swiss central banks highlighted the so-called natural interest rate Thursday, which could play an important role in implementing each country's monetary policy. At the international conference hosted by the Bank of Korea (BOK), Swiss National Bank Chairman Thomas Jordan said the natural interest rate (r*) has become an important reference point for monetary policy over the past years. "Over the past two years, real interest rates have risen back to a level slightly above zero. This mainly reflects the tightening of monetary policy in many countries but, at the same time, raises the question of whether the natural interest rate has increased again," Jordan said during the conference, titled "The Evolution of the Natural Interest Rate and Its Implications for the Global Economy." Thomas Jordan, head of the Swiss National Bank, delivers a keynote speech during the Bank of Korea's annual conference at its headquarters in Seoul on May 30, 2024. (Yonhap) The natural interest rate is usually known as the real interest rate at which a central bank's monetary policy stance is neither accommodative nor restrictive. In particular, it is the rate that is consistent with stable inflation and a closed output gap in the medium term. The Swiss bank chief said the uncertainty that surrounds measuring the natural interest rate complicates each central bank's use in the monetary policy process. "Nevertheless, neglecting the natural interest rate in practical monetary policy considerations would be a mistake," he said. BOK Gov. Rhee Chang-yong also highlighted the importance of the natural interest rate in consideration of financial stability. "Not only price stability, our mandate is also to look at financial stability. So we're always trying to get a natural interest rate estimate in consideration of financial stability too," Rhee said. "We usually find that the level of the natural interest rate is slightly above the natural interest rate for financial stability." Source: Yonhap News Agency