Easing inflationary pressures have created a debate about whether central banks will start to lower interest rates. Our estimates of the neutral rates embedded in sovereign yield curves suggest that neutral rates have risen by more than 100 basis points since January 2021 in Mexico, the UK and New Zealand. We estimate that neutral is 20 basis points higher in South Africa, and down by about 10 basis points in the US. For South Africa, a higher neutral rate implies that the long term expected level of the policy rate is now slightly higher than it was previously estimated to be. For the US, a lower neutral rate limits the Federal Reserve’s ability to cut rates in a recession.
