ECB's Stance on Neutral Interest Rate

The European Central Bank (ECB) has recently confirmed that its estimate for a neutral interest rate remains steadfastly between 1.75% and 2.25%. This announcement came in a bulletin released on Friday, indicating that the real neutral rate has seen little to no change since the end of 2023.

Challenges in Rate Calculation and Policy Guidance

Despite the stability in the neutral rate, the ECB has expressed concerns over the reliability of the models used to calculate this rate, labeling them as "very uncertain." The central bank also highlighted the limitations of using the neutral rate as a definitive guide for monetary policy decisions. The complexities arise from "multiple types of uncertainty and the focus on the short-term interest rate instrument," making it challenging to use the neutral rate as a standard for rate-setting during policy meetings.