The neutral rate: a benchmark missing from the quote screens that still moves OFZ

The neutral rate is the level of the key rate at which monetary policy neither heats up the economy nor holds it back: inflation stays at the Bank of Russia's target and output is close to its potential. It is not published as a quote and cannot be observed directly — it is a calculated value, an estimate. The practical meaning for a portfolio is simple: whether policy is tight or loose is determined not by whether the rate has risen since the previous meeting, but by how far it stands from the neutral level. The rate can be cut at several meetings in a row and remain tight the whole time.

What exactly is "neutral" about the neutral rate

Neutrality here means the absence of an impulse. If the rate is below neutral, credit is cheaper than the economy "deserves" at its potential, demand grows faster than supply — and inflation accelerates. If it is above, the opposite happens: saving is more attractive than consumption, demand contracts, inflation slows. The neutral rate itself delivers neither of those pushes.

A distinction is drawn between the real neutral rate (denoted r*) and the nominal neutral rate. The real rate is determined by the structure of the economy: the propensity to save, demographics, productivity, the country risk premium, access to foreign capital. The nominal neutral rate is the real rate plus the inflation target that the Bank of Russia sets out in its monetary policy documents. An important consequence follows: a change in the inflation target shifts the nominal benchmark without changing the real rate, while sanctions-related restrictions on capital flows or a rise in the risk premium shift the real rate.

The neutral rate is a relative, but not a twin, of several familiar concepts. It is not equal to the yield on short-dated government debt (the risk-free rate), although the two values are pulled towards each other over a long horizon. It is not equal to the rate at which an investor brings future cash flows back to the present day (the discount rate), but it lays the foundation for it. And it is not an instrument: the Bank of Russia's board of directors sets the key rate, whereas the neutral rate is something it only estimates.

Why it can be estimated but cannot be measured

The neutral rate is an unobservable variable. It is extracted from the data by models: from the dynamics of inflation and the output gap (the Laubach–Williams approach and its versions for open economies), from surveys of market participants, from the shape of the yield curve at long maturities, from cross-country comparisons. Different methods give different answers, and their confidence intervals are wide — wider than the size of a rate move at a single meeting.

How the benchmark finds its way into the price of OFZ and equities

The long end of the government debt curve is precisely the market's opinion of the neutral rate plus premiums for term and for uncertainty. When participants raise their estimate of the neutral level, yields on long-dated issues rise and their prices fall, even if the key rate did not change that day. The curve itself can be viewed in the government bond section, and the mechanics of how the regulator's decision reaches specific securities are examined in a separate piece on the key rate.

For equities the channel is different, but the source is the same. A company's valuation is its discounted future cash flows, and the denominator of that fraction starts with the risk-free rate, for which the neutral level serves as the anchor. That is why an upward revision of the benchmark hits harder those stocks whose value is concentrated in the distant future, and less hard those companies with a short and predictable cash flow. On the Russian market this difference shows up, among other things, through dividend policy: the payout calendar and issuers' financial statements are in the dividends and reports sections. The terms you will come across along the way are collected in the glossary.

Tightness is measured by distance, not by direction

The most common mistake in reading macro news is to treat a rate cut as an easing of policy. Easing is a narrowing of the gap between the key rate and the neutral rate. As long as the gap is positive and wide, policy remains restrictive whatever the direction of the latest moves. The reverse is also true: a pause with the rate below neutral is continuing stimulus, not neutrality.

From this comes a working sequence for the investor. Step 1: in the regulator's statement, separate the phrases about the current decision from the phrases about the benchmark over the medium-term horizon. Step 2: check whether the neutral rate range itself has changed in the documents — that is more significant news than the latest decision. Step 3: compare this with what is already priced into the long end of the curve; if the market has long been living with a higher benchmark, an official revision may barely move prices.

What this text does not contain

There is no current value of the key rate here, no official neutral rate range and no inflation target in figures: the platform's database does not supply substitutable values for them, and writing them out from memory in a macro piece is the worst possible choice, because all of these values get revised. For the current values, go to the primary source — the Bank of Russia's statements and reports — and for the market's reaction to them, see the news feed and the events calendar.