Exclusive: ECB Governing Council Discussed Neither the Neutral Rate nor the Terminal Rate

13 June 2022

- ECB insider: ‘One day we will approach’ topic of neutral rate, but now dealing with hiking
- ECB insider: ‘Very broad and diverging views’ on where neutral rate stands
- ECB insider: Lagarde said, ‘We may have different views, but today we need to take a decision’

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s Governing Council last week left the issue of the euro area’s neutral rate untouched so as not to unduly overload the discussion, but will eventually delve into the topic, Econostream understands.

Asked at Thursday’s press conference where she considered the neutral rate to be, President Christine Lagarde said that this was ‘a topic that we have deliberately decided not to have on the occasion of this Governing Council meeting’ and that ‘we had plenty to discuss so we saved a little bit for later.’

There is not a monolithic view at the ECB as to where the neutral rate stands, an ECB insider told Econostream afterwards.

‘There are very broad and diverging views and again, she was right, we have not discussed this’, he said. Reams of theoretical material provided Council members suggested that the real neutral rate was anywhere ‘from -0.5 to 1.0 or so’, he said.

‘Each model may provide a different result’, he said. ‘So, we have not discussed it, and again, you can start discussing theoretical concepts. but then we would need a month to take a decision. So, we can’t make it too complex. One day we will approach this, but at this point in time we are dealing with when to hike.’

A second insider, speaking days before last week’s Governing Council meeting, suggested that ‘zero is not an extremely bad estimate’ of the real neutral interest rate in the euro area. ‘It could be negative, it could be positive. It’s not greatly negative and it’s not percentage points’, he said.

‘But let’s say the natural rate is -0.5%, so the neutral nominal is 1.5%; I don’t think that a policy rate below 1.5% is accommodative and above that it’s tightening’, he said. ‘There’s no such clear-cut thing. There never is a unique natural rate above which you are tightening and below which you are accommodating. I simply don’t see it like that.’

The first insider, speaking after last week’s meeting, also said that there had been no discussion on Wednesday or Thursday of the terminal rate to which the ECB envisaged taking borrowing costs in the current hiking cycle.

Again, theoretical papers distributed among monetary policymakers contain relevant numbers, he said.

‘But this does not mean that we need to discuss it at the moment’, he said. ‘It’s just the beginning of hiking. And I very much agree with this approach, because otherwise we would wind up with no decision taken. What did Lagarde say? “We may have different views, but today we need to take a decision.”’