ECB President Christine Lagarde stated that the neutral interest rate, or r-star, is of limited practical value for current monetary policy decisions. She emphasized that the concept is theoretical and primarily applicable to a shock-free economic environment.
The European Central Bank recently increased its deposit facility rate to 2.50% following a 25 basis point hike. This figure aligns with the upper bound of the staff's estimated nominal neutral rate range, which spans from 1.75% to 2.50%.
Lagarde noted on June 11 that the Governing Council has not discussed the neutral rate during policy deliberations. The bank is prioritizing real-world data and traditional interest rate settings over theoretical constructs due to ongoing supply shocks and geopolitical tensions.
The current 2.50% rate reflects a shift from the negative rate environment that existed until mid-2022. European banks have benefited from this tightening through improved net interest margins, while the ECB maintains a data-dependent approach to future adjustments.
