Where should the interest rate be?

[Richard Borrett]

Taylor's Rule*
According to Taylor’s Rule, the prime interest rate should be:

“neutral” Real prime rate (avg 09/89 – 07/95; 1999 – 2007) = 5.5%

Expected CPI inflation: 4Q/2010 = 5.0%

0,5 x (currant CPI[7.9%] – CPI ‘target’[4.5%]) = 1.7%

0.5 x (output “gap”) = -2.2%

Target Prime Interest Rate = 10.0%

Current Rate = 11.0%
With the prime interest rate still lingering at 11%, the SARB is currently only 1.0% behind what a rough Taylor estimate suggests should be the interest rate level TODAY.