Understanding the ECB's Stance on Neutral Interest Rates

The European Central Bank (ECB) has recently reaffirmed its estimation of the neutral interest rate, placing it firmly between 1.75% and 2.25%. This announcement, detailed in a bulletin released on Friday, underscores the bank's observation that the real neutral rate has remained "broadly unchanged since the end of 2023."

Challenges in Utilizing the Neutral Rate for Policy Guidance

Despite this clarity, the ECB has highlighted significant challenges in leveraging the neutral rate for monetary policy guidance. The bank pointed out the "very uncertain" nature of the models used to calculate the neutral rate, emphasizing the limitations of its utility in steering policy decisions. The complexity arises from "multiple types of uncertainty and the focus on the short-term interest rate instrument," making it difficult to adopt the neutral rate as a definitive norm in policy meetings.