Stable Yet Uncertain: ECB's Neutral Rate Estimate

In a recent bulletin, the European Central Bank (ECB) has reaffirmed its estimate for the neutral interest rate, maintaining it between 1.75% and 2.25%. The ECB noted that the real neutral rate has remained broadly unchanged since the end of 2023, signaling a period of stability in the face of economic fluctuations.

Challenges in Neutral Rate Calculation

Despite the stability, the ECB highlighted the inherent uncertainties in the models used to calculate the neutral rate. These uncertainties, coupled with the focus on short-term interest rate instruments, limit the neutral rate's effectiveness as a definitive guide for monetary policy decisions. The central bank's acknowledgment of these challenges underscores the complexity of navigating economic policy in uncertain times.