Finding r-star after the Great Divergence

TL;DR: The nominal neutral rate of interest is around 4.6 per cent. Probably.

The cash rate is at 4.10 per cent. Half the commentary calls this restrictive, the other half calls it appropriate, and a vocal minority calls it inadequate. Almost everyone making these claims is implicitly comparing the current rate to neutral. Almost no one explains where their estimate of neutral comes from.

This post is an attempt to be honest about what we can and cannot say about neutral, using work I have done.

The short version. The post-GFC decade was unusual on multiple dimensions, including unusually low equilibrium real rates. The post-COVID period has seen a partial return to more familiar dynamics. Multiple methodologies, including a careful estimation I have built and tested, place the current cash rate within the range of plausible neutral estimates. The level is not extreme by historical standards, even though intuitions formed during the 2010s might suggest otherwise.

Weekly Energy Update

 Crude prices/futures

Update on the Iran War: the Mexican Standoff

Where Things Stand

Sixty-one days after Operation Epic Fury began, the war has settled into a structure neither side wants to call by its real name. The shooting has mostly stopped. Nothing else has been resolved.

A two-week ceasefire took effect on 8 April after Pakistani mediation. Trump has since extended it indefinitely. Both sides have accused each other of repeated violations. On 11 and 12 April, US and Iranian officials met face-to-face in Islamabad for twenty-one hours, the highest-level direct talks since 1979. They produced nothing. By 12 April Vance had publicly conceded no agreement. By 13 April the US Navy had imposed its own blockade on Iranian ports. By 18 April Iran had reimposed the Hormuz closure it nominally lifted the previous day.

This is the war now. A dual blockade with no agreed terms, no fixed deadline, and no visible off-ramp. Iran controls the Strait of Hormuz. The United States controls Iranian ports. Both sides are inflicting sustained economic pain on each other and on third parties who never asked to be involved. US Central Command (CENTCOM) has redirected 38 ships from Iranian ports. Iran has reduced Hormuz traffic to a trickle. The Pentagon has assessed that mine clearance alone could take six months.

Central Bank Purposefulness, Take Two

I wrote about central bank purposefulness a couple of months ago, and on reflection I was not happy with what I had written. The argument was buried under too much scaffolding. This is a second attempt, stripped back to what I actually wanted to say. The core argument is that a central bank should follow three principles:

• Don't be a cowboy;
• No surprises; and
• Stay in your lane.

The first is about how the Bank moves, the second about how it communicates, and the third about what it comments on. Each is a piece of the same underlying point. The Bank's credibility is the asset that makes its instrument work, and credibility is built and lost through the ordinary discipline of how the institution carries itself. Cowboy rate setting depletes it. Surprises deplete it. Editorialising on matters outside the mandate depletes it. Everything else in the post is consequences of those three.

Should the RBA Raise Rates in May 2026

The Monetary Policy Board meets on 4 to 5 May. The cash rate sits at 4.10 per cent after two consecutive 25 basis point hikes in February and March, the first reversals of the easing cycle that ran through 2025. Markets are pricing roughly a 60 per cent chance of a third hike. The case for or against another move depends on what the data say about the underlying inflation problem, not on what borrowers would prefer to hear.

The framework set out in Inflation: Causes, Diagnosis and Cures is a useful discipline here. Diagnose first. Decide second. Skipping the diagnostic step is how public commentary about monetary policy generates more heat than light. So let me work through the diagnosis using the five drivers the framework identifies, then turn to the policy question.

Inflation: Causes, Diagnosis and Cures

The Bloomberg Commodity Index, a broad-based benchmark covering energy, metals, and agricultural commodities, is up at the moment. In the past this index has been correlated with periods of higher inflation.

Weekly Energy Price Update

 Spot prices