It may be premature for monetary authorities to conclude that they can afford to be less aggressive in raising policy rates simply because economic growth has slowed markedly. Such a proposition is understandable, particularly when growth is losing altitude. But monetary policy is not made by looking at growth alone. And sometimes what appears to be caution in monetary policy can, under different circumstances, become a rather expensive form of complacency.
The more fundamental question is not whether the policy rate is high or low in nominal terms. It is whether monetary policy is sufficiently restrictive in real terms.
At a policy rate of 4.75% and headline inflation of 6.2% in July, the ex-post real policy rate is approximately negative 1.45%. That is not exactly the picture of a monetary policy stance straining the economy under an unbearable weight of tight money. Indeed, if inflation remains above the policy rate, keeping the nominal rate unchanged means allowing the real policy rate to remain negative. If inflation rises further, the real stance becomes even more accommodative.
This distinction matters because monetary policy can be described as “steady” in nominal terms while becoming progressively easier in real terms. What looks like prudence on the surface can therefore amount to accommodation underneath.
