Neutral interest rate: ECB models and dot plot
The “neutral interest rate” is becoming the focus of discussions about the ECB's future course.
Commerzbank Economic Research
01/16/2025
Even if the neutral interest rate is a vague concept, most central banks and ECB Governing Council members have it in their toolbox in order to at least get a feel for where the interest rate could lie at which the economy grows without tension and inflation settles at 2% in the long term. President Lagarde also stated at the press conference after the last interest rate meeting that the neutral interest rate would be discussed in the coming months.
ECB study points to 2% to 3%
At the beginning of 2024, ECB economists discussed in a study where the natural interest rate could lie according to various concepts. The ECB uses a series of semi-structural models and dynamic stochastic general equilibrium models for this purpose, with only the median of the results of the respective model class shown in Chart 1. So far, the ECB has not published any updates for the two model classes mentioned, which is why the results are only available until the fall or the end of 2023. However, the results of at least the semi-structural models are quite stable over time, which is why the level of the estimated neutral interest rate is unlikely to have changed significantly up to the current margin.
At the same time, the ECB derives an estimate of the neutral interest rate from the futures markets. This is the market's perception of the one-year interest rate in nine years' time. This market-based estimate based on overnight index swaps (OIS) was once cited by Governing Council member Villeroy as an acceptable approximation for the natural interest rate. Last but not least, the ECB economists have compiled estimates of the natural rate of interest from the Survey of Monetary Analysts (SMA) and Consensus Economics. We were easily able to bring these two data series up to date.
All in all, the results suggest that the equilibrium nominal interest rate is likely to be between 2% and 3%. In comparison, our own methodology is based on the “golden rule of capital accumulation” developed by Edmund Phelps and our estimate of the neutral interest rate is at the upper end of the range.
For full text see attached PDF-Version.
