It puts all three into equilibrium, in terms of savings and investment, current and future labour employed, current and future preferred leisure, etc. If monetary policy does not in broad terms “respect” the evolution of the real interest rate, it can create imbalances one way or the other. If you go too high above the real interest rate and the actual real interest rate is above the natural one, you create recessions, unemployment, falling investment and declining asset prices. And if you go lower or substantially below the equilibrium interest rate, you create overheating, excessive debt and rapidly increasing asset prices. Even more importantly, moving the statutory interest rate has fundamental effects on the financial sector. The financial sector is a time-transforming sector – every second, it transforms the present into the future (short-term liabilities into long-term assets – typically done by banks) or vice versa (long-term liabilities into short-term assets – typically done by insurance or pension companies). Whenever you take the policy rate above the equilibrium interest rate, you create a problem out of what happened in the financial sector in the past. Whenever you go substantially below, you create problems in the future. I have chosen non-performing loans as an example that is, I believe, quite easy to understand. If you substantially increase rates now, many projects from the past become unviable and non2/5  BIS central bankers' speeches  performing. If you go substantially below, many of the currently new projects will become unviable in the future when rates return to equilibrium.
Most of all, they are stoking fears of a fall in the purchasing power of money, paradoxically at a time when inflation (the key measure of the purchasing power) in developed countries is lower on average than it has been for years! Put simply, we have been warning about the risk of flooding for so long that we are now unable to explain that drought can be just as big a problem and that at times of drought you have to water the garden, not keep draining it dry. If the hosepipes are blocked, moreover, you have to use other means to supply the plants with water. If we do not succeed here, we central bankers will have great difficulty being credible in the future. 4/5  BIS central bankers' speeches  Literature: Holston, K., Laubach, T., & Williams, John C. (2016): “Measuring the natural rate of interest: International trends and determinants,” Working Paper Series 2016–11, Federal Reserve Bank of San Francisco. 5/5  BIS central bankers' speeches