The European Central Bank may still be several interest rate cuts away from the level where it stops holding back economic growth, it said in a paper on Friday, though it downplayed the significance of the latest estimate.
The neutral or natural level for the deposit rate, which neither stimulates nor restricts growth, is now seen between 1.75% and 2.25%, the bank said in an Economic Bulletin article, arguing that this level has not changed significantly in recent years.
The figure, below the 1.75% to 2.5% range offered by ECB President Christine Lagarde in December, is likely to fuel speculation that more rate cuts are coming, given weak economic growth that is bound to weigh on inflation and allow the ECB to get back to its 2% target after four years of overshooting.
But the ECB also went out of its way to downplay the significance of the new estimate, arguing that it was not useful for setting policy given that neutral could not be precisely measured and models carry a "very high degree" of uncertainty.
"The inherent uncertainties as well as conceptual shortcomings limit the usefulness of available natural rate estimates for conducting monetary policy in real time," the ECB said.
The neutral rate has been in focus in recent months after several policymakers said this would be the next aim and the ECB axed a reference to keeping policy "sufficiently restrictive".
The new estimate suggests that the ECB's deposit rate, now at 2.75%, would need two more cuts before it hit the top end of the estimate range.
This is already well anticipated, as investors see between three or four more rate cuts this year given that the bank is increasingly concerned over anaemic growth.
The paper also argued that this neutral level, referred to as "r*" in central bank-speak, has not shifted significantly since the pandemic, despite some estimates to the contrary.
"Following a modest post-pandemic increase, the updated range of point estimates of the real natural rate of interest for the euro area has remained broadly unchanged since the end of 2023 and is consistent with the estimates documented," the ECB added.
While some policymakers have suggested their own ranges for the neutral rate as potential policy guideposts, others, particularly on the ECB board, have been playing down any figure.
"Neutral is a very powerful analytical concept but not terribly useful for setting monetary policy, given this embedded uncertainty," ECB board member Piero Cipollone said this week.
Philip Lane, the ECB's chief economist, meanwhile argued that a host of factors determined how restrictive policy may be and these cannot be expressed by a single indicator.
