What Is the Nominal Neutral Rate?

When the cash rate is:

• Below neutral, policy is stimulatory
• Above neutral, policy is restrictive
• Near neutral, the economy can grow without policy support or restraint

The RBA often refers to this concept simply as the “neutral rate”.

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Nominal Neutral Rate Explained

In simple terms, the nominal neutral rate is the “Goldilocks” level of interest rates.

• It’s not too hot: It doesn’t stimulate the economy so much that inflation spirals out of control.
• It’s not too cold: It doesn’t weigh the economy down so heavily that businesses close and unemployment rises.
• It’s just right: It allows the economy to grow at a sustainable pace while keeping inflation stable (between 2–3%).

Think of the economy like a car driving on a highway.

• The Cash Rate is the pedal.
• The Neutral Rate is the speed limit or the “cruising speed.”

If the RBA wants to slow the car down (because inflation is speeding), they have to ease off the gas or hit the brakes. If they want to speed up (because the economy is stalling), they press the accelerator. The “Neutral Rate” is the speed at which the car cruises comfortably without accelerating or braking.

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What Is The Nominal Neutral Rate Right Now?

No one knows precisely, including the RBA. Because the neutral rate cannot be directly observed, it must be estimated using economic models. These estimates change over time as conditions change.

However, most private-sector economists and the RBA’s commentary imply that Australia’s nominal neutral cash rate currently sits in the low-to-mid 3% range, often described as “around 3–4%”.

This should be understood as a broad range rather than a precise target.

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Why Doesn’t The RBA Publish A Neutral Rate?

The RBA has repeatedly explained that the neutral rate:

• Cannot be directly observed
• Changes over time
• Depends on structural factors, including productivity growth, population growth (migration), inflation expectations, global savings and investment trends

As different models produce different results, publishing a single number could be misleading.

So, the RBA uses the neutral rate as a conceptual reference point to assess whether overall financial conditions are:

• Accommodative
• Restrictive
• Or broadly neutral

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How The Nominal Neutral Rate Shapes RBA Policy

Understanding neutral helps explain why the RBA moves between three broad policy modes.

1. Below Neutral: Stimulus (The Accelerator)

• When: 2020–2021 (Pandemic period)
• Cash Rate: 0.10%
• Estimated Neutral: ~3–4% (long-run estimate)

Explanation: The economy faced a severe shock. By setting rates far below neutral, the RBA made financial conditions highly accommodative. This encouraged borrowing, spending, and investment, which is why mortgage rates fell below 2%.

2. Above Neutral: Restrictive (The Brake)

• When: 2023–2024 (Inflation surge)
• Cash Rate: 4.35%
• Estimated Neutral: ~3.5–4%

Explanation: Inflation was well above target. The RBA tightened financial conditions by lifting rates above neutral, slowing demand across the economy. Higher mortgage rates were a transmission mechanism of that policy tightening.

3. Around Neutral: Balanced (Cruising Speed)

• When: Late 2025–2026 (Current policy stance)
• Cash Rate: ~3.60%
• Estimated Neutral: ~3.5%

Explanation: As inflation moved back toward the target, keeping policy highly restrictive risked unnecessary economic weakness. The RBA eased rates toward neutral, not to stimulate, but to allow the economy to operate without excessive restraint.

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What The Nominal Neutral Rate Means For Home Loan Interest Rates

The neutral rate helps explain why falling cash rates do not always make borrowing easy.

If the cash rate falls but remains near or above neutral, banks may still:

• Apply conservative serviceability buffers
• Maintain cautious lending standards
• Limit aggressive credit growth

As a result, mortgage rates may fall modestly, but borrowing conditions can remain relatively tight.

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Why This Matters for Home Loan Decisions

Understanding the neutral rate shifts focus away from short-term rate predictions.

Instead of asking only “When will rates fall?”, it can be more useful to consider:

• Whether policy settings are restrictive or neutral
• How lenders assess risk under current conditions
• Whether your loan structure can comfortably handle today’s “normal” rates

This leads to decisions based on how the system actually operates.

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The Key Takeaway

The cash rate matters, but it does not tell the whole story.

The nominal neutral rate explains why:

• Rates can fall without borrowing becoming easy
• Lending can stay tight even as interest rates move lower
• Headlines don’t always match borrower experience

For home buyers and homeowners, understanding this difference can lead to clearer expectations and better decisions around your home loan.

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Disclaimer: This information is general in nature and does not take into account your objectives, financial situation, or needs. It is not financial advice. Interest rates and RBA policy are subject to change. Always consult a qualified mortgage broker or financial adviser before making decisions about your home loan.