ECB’s Lagarde describes neutral rate band as evolving concept, downplays its policy relevance

Christine Lagarde wants everyone to stop fixating on the neutral rate. The ECB president characterized the concept as a work in progress, one that holds limited practical value for the central bank’s actual decision-making. Her comments land at a time when the ECB is navigating a complicated inflation picture, having recently raised its deposit facility rate to 2.50% after a 25 basis point hike. What the neutral rate actually is, and why Lagarde isn’t impressed The neutral rate, sometimes called r-star, is the interest rate at which monetary policy neither stimulates nor restricts economic growth. The problem, as Lagarde pointed out, is that it only really applies to a “shock-free world.” ECB staff estimates have placed the nominal neutral rate somewhere between 1.75% and 2.50%. Lagarde noted on June 11 that the Governing Council hasn’t even discussed the neutral rate or its range during policy deliberations, citing the difficulty of making precise assessments when external shocks keep reshuffling the deck. A return to basics amid geopolitical turbulence Rather than anchoring policy to theoretical constructs, Lagarde has signaled a return to what she calls the “basics” of monetary ...