The neutral interest rate cannot be observed directly, yet it shapes every judgement about whether policy is tight or loose – and Governor Bullock says it "is sort of moving up a little bit" globally.

Every time the Reserve Bank of Australia sets the cash rate, it is implicitly measuring it against a benchmark no one can see. That benchmark is the neutral interest rate – the level at which monetary policy is neither pushing the economy forward nor holding it back.

At her media conference on 29 September 2026, after the Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60%, Governor Michele Bullock offered a notable observation about that benchmark. The neutral rate, she said, "is sort of moving up a little bit" globally.

It was a brief remark, delivered in characteristically plain language. But it carries implications for how restrictive current policy really is, how high rates may need to go, and where they might eventually settle.

What the neutral rate is

Think of the neutral rate as the interest rate at which the economy would run at full capacity with stable inflation, once temporary shocks have passed. If the policy rate sits above neutral, it acts as a brake: borrowing is relatively expensive, saving is relatively attractive, and demand is restrained. If the policy rate sits below neutral, it acts as an accelerator.

The difficulty is that the neutral rate is not published anywhere and cannot be measured directly. Economists estimate it using models and by observing how the economy responds to different rate settings, and those estimates come with wide margins of uncertainty. They also change over time, because the neutral rate reflects deep, slow-moving forces in the economy.

Governor Bullock acknowledged that imprecision. She said financial conditions are restrictive, but that measuring exactly how restrictive they are is imprecise. That is the neutral-rate problem in a nutshell: a central bank can be confident about the direction of its policy stance while remaining uncertain about its degree.

Why a neutral rate might rise

The Governor did not attribute the global shift to any single cause in her remarks. In general terms, economists point to the balance between how much the world wants to save and how much it wants to invest. When desired investment rises relative to desired saving, the interest rate needed to balance the two tends to rise as well.

Factors commonly discussed in this context include:

  • Investment booms, which increase the demand for funds.
  • Government borrowing, which competes for the pool of available savings.
  • Demographic change, which alters how much households save over their lifetimes.
  • Productivity trends, which influence the return on new investment.

Some of these themes echo elsewhere in the Governor's remarks, although she did not directly link them to the neutral rate. She said a "Global AI investment boom has driven significant price rises for some inputs" and that "The AI boom is also adding to demand in the Australian economy." On productivity, she was blunt: "Productivity growth remains weak"; "productivity is doing nothing."

What a higher neutral rate means for policy

If the neutral rate is higher than previously thought, the implications run in several directions.

First, a given cash rate is less restrictive than it might appear. A setting of 4.60% applies less braking force against a higher neutral rate than it would against a lower one. That may help explain why, in the Governor's words, "Domestic spending and investment have been stronger than expected", and why the Board noted growth has slowed but remains stronger than expected.

Second, it may take a higher cash rate to achieve the same degree of restraint. The Board's forward guidance keeps that possibility open: it "will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed."

Third, the eventual resting point for rates, once inflation is back to target, may be higher than in the past. The Governor made that explicit: "We're not going back down to interest rates of zero or very close to zero." For borrowers who took on debt during the era of ultra-low rates, that is a significant change in the backdrop.

Why the invisible benchmark matters now

The neutral rate matters most when inflation is proving stubborn. The Board said "inflation remains elevated" and that "recent inflation outcomes in Australia were stronger than expected at the previous meeting". Headline inflation was 4.0% over the year to August on the monthly CPI indicator, while the Governor said underlying inflation has "been about 3.5 per cent for the past six months". The target is 2–3%, with a midpoint of 2.5%.

If policy is less restrictive than assumed, inflation may take longer to fall. The Governor said "Inflationary pressures will persist for longer than previously expected", and the Board warned high inflation must not become "embedded".

At the same time, uncertainty about the neutral rate cuts both ways. Because it cannot be measured precisely, there is a risk of doing too little, but also of doing too much. That is one reason the Board emphasises incoming data rather than any fixed plan, and why it described "heightened uncertainties" in its statement.

The RBA's latest published forecasts, in the August Statement on Monetary Policy, were prepared when the cash rate was 4.35% and predate the September increase. They had trimmed mean inflation reaching the 2.5% midpoint by early 2028.

For those following the rate outlook, some questions worth considering include:

  • If neutral rates are drifting higher globally, what does that imply for the level at which Australian rates eventually settle?
  • How much of the economy's resilience reflects policy being less restrictive than assumed?
  • How will the Board weigh an unobservable benchmark against observable data such as the 28 October CPI release?

The bottom line

The neutral rate is the invisible yardstick behind every rate decision. Governor Bullock's observation that it "is sort of moving up a little bit" globally suggests the 4.60% cash rate may be doing less braking than a headline number implies, and that the floor for rates in future may sit well above the lows of recent history. With measurement imprecise and uncertainty heightened, the Board is relying on the data – and its next decision falls at 2:30 pm AEDT on 3 November 2026.