Neutral Rate

Neutral rate means the interest rate level that is thought to neither stimulate nor slow the economy. In simple terms, the neutral rate is the rate that keeps the economy balanced. The neutral rate is important because central banks compare current policy rates with it. If rates are above the neutral rate, policy may be restrictive. If rates are below it, policy may be stimulative. For example, if inflation is high, a central bank may keep rates above the estimated neutral rate to slow demand. The neutral rate is not directly observable. Economists estimate it, and those estimates can change over time.