ECB Governing Council Members’ Recent Comments on r*

15 August 2024

By Isabel Teles – FRANKFURT (Econostream) – In the following, we reproduce European Central Bank Governing Council members’ recent comments communicating their views as to where r*, the neutral level of interest rates, might lie in the euro area.

In the Economic Bulletin published in February 2024, the ECB said that uncertainty complicated the measurement of r* and its use as an indicator for monetary policy.

‘While cyclical measures of euro area r* have been edging higher, slow-moving estimates anchored to long-run economic trends are unlikely to have risen’, the ECB said. ‘The estimates vary widely, reflecting a high degree of model uncertainty and differences in model-specific inflation stabilisation properties.’

Owing to the impossibility of knowing precisely where r* is at a given moment in real time, and to concerns that an estimate of r* will be understood as an indication of the endpoint of policy easing, Governing Council members have tended to hold back with exact estimates, but their comments are consistent with a lower nominal bound of 2%.

Bank of Greece Governor Yannis Stournaras:

  • 01 August 2024: ‘The existing estimates are subject to considerable uncertainty. Philip Lane recently estimated it at nominal 2%, Isabel Schnabel also assumes a nominal range of between 2 and 2.5%. I am inclined to agree with these estimates overall.’
  • 01 August 2024: [Commenting on whether, to be consistent with the projection of 2% inflation by end-2025, interest rates would need to be cut to 2.5% by then, assuming this to be the neutral rate]: ‘Yes, exactly, but keep in mind the associated uncertainty.’

ECB Chief Economist Philip Lane:

  • 30 July 2024: ‘And the question is what is the interest rate we need to keep inflation at 2[%]. And essentially it’s still the case. A lot of the research, including here at the ECB, would say that that interest rate remains relatively low. So you get a scenario where maybe the policy rate will be somewhere between 2[%] and 3[%]. We published estimates in our Economic Bulletin earlier this year, where a lot of the estimates were essentially [saying] that the real interest rate would be around zero, which means a policy rate around 2[%], when you add 2% inflation. But there’s definitely more weight now on a little bit above 2[%] as well.’

ECB Executive Board member Isabel Schnabel:

  • 17 May 2024: ‘The current policy cycle is special in the sense that rate cuts are not meant to counter a looming recession, but rather to gradually withdraw restriction without reigniting inflation. This is quite challenging, because we need to take a stand on the level at which our interest rates may no longer be restrictive. Many people believe that the natural rate of interest has moved up and I share that view, especially given the exceptionally high investment needs arising globally from the green and digital transitions. But it's virtually impossible to quantify a change in the natural rate of interest in real time with any reasonable degree of precision. So, we will continue to look at the incoming data in order to assess how restrictive our monetary policy really is at each point in time. And the closer we get to a potentially neutral level, and this could be well above 2%, we need to move even more cautiously.’

Central Bank of Ireland Governor Gabriel Makhlouf:

  • 17 June 2024: ‘At our meeting on the 6 June, we cut rates by 25bp, whilst also stating that we are not committing to a particular rate path. This leaves policy rates firmly in restrictive territory, given where we see the nominal neutral rate (around 2% in latest ECB estimates) and the path for inflation.’

Latvijas Banka Governor Mārtiņš Kazāks:

  • 2 July 2024: ‘I think the only thing we can say is that we are in restrictive territory. But looking at confidence indicators and lensing, r* currently is certainly not at 3.75%. Is it at 2%? I don’t think so.’

ECB President Christine Lagarde:

  • 11 June: ‘I’m sure we will [discuss the natural rate of interest]. But it’s very premature to start that discussion now. The natural rate of interest is likely to be higher than before the pandemic, but we are currently still far away from it. So I think it's pointless to start discussing that now.’
  • 6 June: ‘[O]n the neutral rate, you know that I have refrained systematically from erring towards a particular number or identifying a neutral rate or a range around the neutral rate. I will simply say this: if it has increased compared with where it was before the coronavirus (COVID-19), we also know that we are far away from the neutral rate now. And by moving from 4% to 3.75% on the DFR, we are not close to the neutral rate. So we still have a way to go.’

Banque de France Governor François Villeroy de Galhau:

  • 7 June 2024: ‘As for monetary policy, although it has become less restrictive since yesterday, it will continue to bring down inflation with interest rates that are still significantly above the neutral rate.’

Banco de Portugal Governor Mário Centeno:

  • 15 June 2024: ‘… I don’t know the pace, but we all know the direction. The direction is simple to gauge, because we all know that the natural rate is lower than the current rate. So that’s the direction we must continue in.’