The output gap reflects the difference between the level of output in the economy and potential output and, as such, indicates the degree of excess capacity or capacity constraints in the economy and the implications for inflationary pressures.
We regard the neutral interest rate as the policy rate consistent with the economy growing at its potential in the medium term and having inflation expectations matching the price stability objective. 13  McDermott, J (2013) “the role of forecasting in monetary policy”. Speech to FINSIA, Wellington, 15 March.