Asia Chart of the Week:How tight are policy rates?

Tricky stuff. At first glance they seem loose enough. After all, in most places, theyare near historical lows. But, in itself, that doesn’t tell us much about how tightpolicy rates really are. A slightly more refined approach is to look at real interestrates. In fact, theory tells us that these are what drive economic activity. Giventhe fall in inflation over the past several years, real rates have actually increasedin many places. From this perspective, unless price pressures rebound at somestage, one might think that central banks may even have to cut interest rates againat some point. And that may be true in some cases (for example, we still expecta rate cut in Indonesia). The trouble is that real interest rates are hard to measure.

    In addition, inflation, or more precisely inflation expectations, can bounce aroundquite a bit: a sudden drop can make real rates suddenly seem a lot tighter thanthey perhaps fundamentally are. But there is another, more involved approachto our question. We can estimate neutral interest rates and compare these to theiractual level. If the latter is above the former, policy is tight, and if below, loose.

    The result: policy rates are in most cases actually rather stimulative.