ECB's Stance on Neutral Interest Rate

The European Central Bank (ECB) has recently disclosed that its estimation for a neutral interest rate remains steadfastly between 1.75% and 2.25%. This announcement, made in a bulletin on Friday, underscores the ECB's observation that the real neutral rate has remained "broadly unchanged since the end of 2023."

Challenges in Utilizing the Neutral Rate

Despite the clarity on the neutral rate's range, the ECB has highlighted significant challenges in its application. The bank pointed out that the models used to calculate the neutral rate are "very uncertain," which limits its utility in guiding monetary policy decisions. The ECB attributed this limitation to "multiple types of uncertainty and the focus on the short-term interest rate instrument," making it difficult to use the neutral rate as a definitive norm for rate-setting during policy meetings.