A Matter of No Small Interest : Real Short-Term Interest Rates and Inflation Since the 1990s

In this speech, Marian Bell, member of the Monetary Policy Committee, notes how in recent years low and stable inflation has been combined not only with low unemployment and steady growth in nominal demand, but also with low short-term interest rates, both nominal and real. Nor does this phenomenon appear confined to the United Kingdom. The average real short-term interest rate over an economic cycle appears to have been positively correlated with the level of inflation for a variety of developed economies over the past decade or so, suggesting that the real natural rate of interest consistent with an economy growing at potential and stable inflation might have fallen since the late 1980s across a range of economies. Ms. Bell discusses a number of factors that might account for this relationship, including a reduction in macroeconomic volatility, a reduction in the risk premium, more credible monetary policy and a reduced tax wedge between real and nominal interest rates at lower levels of inflation