ECB’s de Guindos: Not Right to Use Neutral Rate as Reference for Our Monetary Policy
5 February 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Vice President Luis de Guindos said on Wednesday that the neutral rate should not be used as an indicator of future monetary policy moves.
In an interview with Slovak daily Hospodárske Noviny, de Guindos said that ‘using it [the neutral rate estimate] as a reference for monetary policy decisions is not the right approach, in my view.’
Different models estimated very different ranges for the neutral rate, he said, and bank lending surveys were a better gauge of the ECB’s tightening.
‘How much lower rates will go depends on the data confirming that inflation is converging towards our target in a sustainable manner’, he said.
‘We are confident that this will happen this year, but there are still a number of uncertainties, particularly surrounding the geopolitical situation, that we need to take into account’, he added.
Even if the downward path of interest rates was ‘clear’, nobody could know what the terminal rate would be, he said.
High uncertainty called for a more ‘pragmatic approach’, he said, where models and ‘unobservable variables’ make up less of the decision-making process.
Services inflation was expected to decline because wage growth was expected to slow down, he said.
‘We also see our corporate surveys confirming our belief that wage dynamics will start to slow down, so we expect this to help bring down services inflation’, he added.
Despite acknowledging that headline inflation might pick up again in the following months due to base effects related to energy prices, de Guindos acknowledged that the ECB was sure that it would decline towards 2% in the spring in a sustainable way.
‘With regard to tariffs, our analyses suggest that the main impact will be on growth’, he said.
However, estimating how it would affect inflation was harder due to ‘the dampening effect of tariffs on demand and growth, as well as the fact that selective tariffs can lead to trade being redirected and diverted’, he said.
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