Economics and markets

Central banks likely to go above neutral rates to fight inflation

August 26, 2022

Interest rates are likely to rise above the neutral rate to quell inflation
For the United States, Vanguard’s neutral rate estimate is 2%, our terminal rate forecast is 4% and the market-implied terminal rate forecast is 3.6%. For the euro area, our neutral rate estimate is 1.8%, our terminal rate forecast is 2% and the market forecast is 1.4%. For the United Kingdom, our neutral rate estimate is 2.6%, our terminal forecast is 3% and the market forecast is 3.1%. For Australia, our neutral rate estimate is 3.2%, our terminal forecast is 3.6% and the market forecast is 3.5%.
Factors driving higher neutral rates
Vanguard’s six-factor neutral rates model
A line chart with a horizontal axis denoting global savings or global investment as a percentage of GDP, and a vertical axis denoting global real interest rates. Where the upward- sloping savings line intersects with the downward-sloping investment line is the point of equilibrium or the neutral rate. Three drivers shift the savings line: demographics, income inequality, and the global savings glut. Three drivers shift the investment line: productivity growth, relative price of capital, and risk aversion.
What it means for each country
Projected long-run neutral rates through 2030 for select countries
Lines representing neutral rates for six countries plus the euro area fall steeply from 1990 through 2016 before slowly rising. The projected lines through 2030 range from 0% to 4%.


Roxane Spitznagel, Vanguard economist
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