The big question that many investors in European fixed income have been raised this year has found an answer, or, at least, it has found the official response of the European Central Bank: where is the neutral interest rate in the euro zone? In the eyes of the ECB, it is around 2%. Being more precise, The Central Bank places it in the fork between 1.75% and 2.25%. The ECB has published this estimate on the neutral type (the level at which the types do not affect the economy, or stimulating it, or slowing its growth) and, if one takes into account that the organism itself already recognizes that the inflation objective will be fulfilled around summer, this implies that The price of money will probably converge with the neutral type by then, 2%from 2.75% in which they move now, after the last cut that the ECB has carried out, last week. If everything fits, this implies that it will then be, in summer, when the cuts process will end in which the Central Bank is immersed. If this scenario is fulfilled, the ECB has three cuts of 25 basic points ahead in the four meetings that have left until July.
The neutral type, also known as with the R*symbol, has been a reason for debate in recent weeks and, finally, the ECB wanted to answer the questions that have been asked in this regard in the last meetings. In the eyes of the central bank, the level of types that does not affect the economy is now 2%. Assuming its own message, that in summer the inflation objective will have been reached, it can be anticipated that the ECB will want to leave the types at that level at that time, and allows to place the end of this cycle of type cuts in the 2%, three steps below the current level.
The truth is that today’s estimates published by the ECB is anything but surprising. For many reasons, but the main one is that it comes to coincide with the current objective of the ECB of placing 2%types. But the estimates are relevant because at the return of the corner there is a strategic review of the institution’s monetary policy. In principle it is scheduled for June, and although the neutral type does not let it be a chimera, the entire ECB planning revolves on it. So on that side that nobody expects a Copernician turn in the objective of the types.
Not even the estimation of the neutral type has changed with respect to past years. “After a modest increase after the pandemic, the updated range of specific estimates of the real natural interest rate for the euro zone has been practically unchanged since the late 2023 and is consistent with documented estimates,” they indicate in the document .
In fact, today Philip Lane, the chief economist of the institution, just before the report was already warning that too much attention was being paid. “As the guys approach a level that no longer weighs on economic growth, the debate on this theoretical threshold loses some relevance,” he explained in the Odd Lots podcast of Bloomberg. The Irish banker was already advancing that the neutral guy was going to be on the sacrosanct 2% or is no use.
“It is important to have narrative frames, and one of them is that when inflation is well above 2%, it is very important that everyone understands that monetary policy will be restrictive,” said Lane. “Now that we approach that area, let’s not talk about neutrality, let’s talk about what is appropriate.”
Lagarde inflated expectations last week to get rid of the question: how far the types will lower the ECB? But the rest of the companions have subtracted importance from the report. “The neutral type is a very powerful analytical concept, but not too useful to set monetary policy, given the implicit uncertainty,” said Piero Cipollone, a member of the Governing Council of the ECB.
The reality is that the neutral type can make an approximation, but as indicated by the ECB itself is always surrounded by uncertainty and has a huge complexity to calculate it. It is always made with data around yours. The Vice President of the ECB, Luis de Guindos, explained that in no case the bank uses it as an indicator of future movements, And he insists that now the Central Bank is most useful to rely on the results of the bank survey to know what restriction level maintains monetary policy. The neutral type does not even reflect the type of balance at the present time. And he stressed that the survey on bank loans has greater precision. No one knows where the types will be until the last credit operation arrives and establishes the price of money, the interest to which the money is lent.
A guide for type descents
Knowing that the neutral type is 2%, and that the ECB directs its official interest rate towards that level is an important clue for bond investors. The question now is whether the Central Bank will want to leave the stable types at that level, because they see the economy and inflation in equilibrium by then, or if they will have to lower them a little more, if you want to give an impulse to economic growth, At a time when the euro zone is dealing with a brake in its two most important historical engines: Germany and France.
From the Japanese Bank Nomura highlights that “the ECB will cut the types and leave them below the neutral level, to give support to the economy, especially after the GDP data of the last quarter in the euro zone, which negatively surprised to the Central Bank. We hope that the soil of interest rates in this cycle is 1.75%, in September 2025 “Bank experts point out.
The other most likely scenario that experts stand out places the types of a step above. It is, for example, that Blackrock analysts stand out: “Our base scenario is that the ECB will lower types in all its meetings, to reach 2% in summer. Why? First, because the weak growth and the Moderate inflation supports greater cuts.
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