ECB Cites Estimates of Nominal r* in Range 1.75% to 2.25%; ‘Merely Indicative’ Given Uncertainties

7 February 2025

ECB Cites Estimates of Nominal r* in Range 1.75% to 2.25%; ‘Merely Indicative’ Given Uncertainties
- ECB: r* estimates ‘fraught with measurement and model specification challenges and … highly uncertain’
- ECB: r* estimates ‘cannot be seen as a mechanical gauge of appropriate monetary policy’
- ECB: ‘There is no alternative to taking decisions on the basis of a comprehensive analysis’

By David Barwick – FRANKFURT (Econostream) – The nominal natural rate of interest in the euro area could lie between 1.75% and 2.25%, according to European Central Bank research released on Friday.

As expected, the ECB took pains to underscore the myriad issues associated with such estimates, calling measures of r* ‘fraught with measurement and model specification challenges and … highly uncertain’ for a host of reasons.

Consequently, the ECB said, estimates of r* could not be regarded as ‘a mechanical gauge of appropriate monetary policy at any point in time’, but rather, ‘there is no alternative to taking decisions on the basis of a comprehensive analysis of the data and their macroeconomic implications.’

The ECB observed that for purposes of the Eurozone, such an analysis was based on inflation prospects, underlying inflation and policy transmission.

The range of 1.75% to 2.25% cited by the ECB, which the central bank commented ‘should be viewed as merely indicative’, was widely expected, given President Christine Lagarde’s recent placement of the nominal natural rate of interest within this band.

With many observers of the ECB having conflated the natural rate (or midpoint of its range) with the terminal rate of the current easing cycle, policymakers have lately been increasingly pushing back against such an understanding.

It is thus no surprise that the ECB seeks to emphasise that, as the report said, ‘inherent uncertainties as well as conceptual shortcomings limit the usefulness of available natural rate estimates for conducting monetary policy in real time.’

Still, the ECB noted that trends in the natural rate over time ‘contain information about developments in saving-investment imbalances that may create inflationary or disinflationary pressures, as well as about the extent to which the short-term interest rate might become constrained by the lower bound.’