Mr Lambert says that when setting interest rates, “it is critically important to recognise the lack of certainty about all the key issues which have to be addressed”. Although there are yardsticks – such as the output gap and neutral interest rate – against which to judge the appropriate course of action, few of them are directly measurable or easily observable. Yardsticks may also be based on assumptions that are simply wrong and on data that are subject to revision. Mr Lambert says “…there are no set rules”. He demonstrates the difficulties by considering the uncertainty surrounding the neutral real interest rate, measures of the output gap and the equilibrium unemployment rate. He argues that “...it is impossible at any moment in time to pin down the neutral rate with the degree of precision necessary to use it as a guide in each month’s decision”.
Published on
24 May 2005
Press release