Do you realise the Reserve Bank board hasn't changed Australia's official interest rate from 1.5 per cent for almost a year? But that hasn't stopped people in the financial markets from speculating furiously about whether rates are about to go down – or go up.
In the days leading to the board's meetings on the first Tuesday of the month, the market players start arguing and laying their bets.
It's clear the Reserve will have to start raising its official interest rate – also known as the short-term money market's overnight "cash rate" – to dampen the house price boom in Sydney and Melbourne, some people argue.
What's more, don't forget that rates around the world have started going back up. We'll have to follow suit.
Don't be silly, others say, the economy's growth is below par, unemployment is higher than it should be, wage growth is weaker than it's been in decades, and the inflation rate is actually below the bottom of the Reserve's 2 to 3 per cent target range.
In such circumstances, why on earth would the Reserve want to increase its official rate – also called its "policy" rate – which would push up the interest rates actually charged (or paid) by the banks, thus tending to discourage businesses and, more particularly, households from borrowing and spending and thus increasing economic activity?
But then, early last week, the Reserve issued the minutes of its previous board meeting, which revealed it had been discussing our economy's "neutral" interest rate, which the staff estimate had fallen by 1.5 percentage points to about 3.5 per cent, since the start of the global financial crisis in 2007.
Wow, said the rate-rise brigade, what bigger hint do you want? It's obvious the Reserve is softening us up for a return to a series of rate rises – maybe 2 percentage points' worth before it's finished.
Wrong. Next day the Reserve had to explain that the neutral interest rate was far more theoretical than that, and would have very little influence on its decisions about the policy rate in the foreseeable future.
And later that week the Reserve's deputy governor, Dr Guy Debelle, gave a long speech in which he explained what the neutral interest rate is, how it's determined and what notice the Reserve takes of it.
The Reserve uses its "monetary policy" – its ability to control the overnight cash rate, and thus influence the levels of all other short-term and variable interest rates in the financial system – to try to manage the strength of the economy's demand for the production of goods and services.
If it wants demand to grow faster, it lowers interest rates to encourage borrowing and spending. If it wants demand to slow down – usually because everything's roaring along and inflation pressure's building – it raises interest rates.
But how do we know whether, say, the present policy rate of 1.5 per cent, is really low and thus "expansionary", or not low enough to be very expansionary or, for that matter, whether it's so high relative the economy's weak state that it's actually "contractionary" (causing the economy to slow further)?
We know by comparing the actual policy rate with our best estimate of the "neutral" interest rate, which is neither expansionary nor contractionary. It thus provides a benchmark for assessing the "stance" of policy. If the actual official rate is below the neutral rate, the stance of policy is expansionary; if it's above, policy is contractionary.
Just how expansionary or contractionary you can determine with a little arithmetic. Right now, If the neutral rate is 3.5 per cent but the actual rate is 1.5 per cent, that sounds highly expansionary to me.
(Which ain't to say the stimulus is working; clearly, it's not having a huge effect – probably because households already have big debts, and don't want to borrow a lot more.)
Debelle explains that the neutral rate aligns the amount of the nation's saving with the amount of its investment, but does so at a level consistent with full employment and stable inflation.
That is, the neutral rate is where the Reserve's policy rate would be in the medium term if it was achieving the goals of monetary policy – that is, a rate of unemployment of about 5 per cent and an inflation rate within the 2 to 3 per cent target range.
So the level of a country's neutral interest rate will change with changes in the factors that influence saving and investment. Developments that increase saving will tend to lower the neutral rate, whereas those that increase investment will tend to raise it.
Debelle says you can group these factors into three main categories. First, the economy's "potential" growth rate – the fastest it can grow over the medium term without worsening inflation.
The faster a country's population and productivity are growing, the higher its neutral rate is likely to be because there should be strong demand for investment and less inclination to save.
Our potential growth rate is about 2.75 per cent a year, which is lower than it used to be, but higher than for other developed economies.
Second, the degree of "risk aversion" felt by a country's households and businesses. That is, how confident people are that the future is bright. This is what's taken a battering since the financial crisis. Greater aversion to risk makes people wary of investing and more inclined to save.
Finally, international factors. In our open economy, where financial capital can move freely across borders, global interest rates will also influence domestic interest rates.
If you think that means we've lost some of our freedom in the era of globalisation, note Debelle's reassurance: "We don't have the independence to set the neutral rate, which is significantly influenced by global forces. But we do have independence as to where we set our policy rate relative to the neutral rate."
