(Feb 7): Economists at the European Central Bank (ECB) said the neutral rate of interest, a concept that may help determine where cuts in borrowing costs will end, is probably between 1.75% and 2.25%.

That would mean the top of the range could be reached with two more quarter-point reductions in the deposit rate, which currently stands at 2.75%. The mid-point of 2% is where investors and the majority of analysts see rates settling.

The researchers cautioned, however, against an over-reliance on neutral, which represents a theoretical level for borrowing costs that neither stimulates nor restricts economic activity.

While estimates “provide complementary information for monetary-policy decisions and aid communication on the stance of monetary policy, these cannot be seen as a mechanical gauge of appropriate monetary policy at any point in time,” Claus Brand, Noemie Lisack and Falk Mazelis wrote.

“In conducting monetary policy, there is no alternative to taking decisions on the basis of a comprehensive analysis of the data and their macroeconomic implications,” they said.

The research forms part of a debate over the final stages of the ECB’s rate-cutting campaign, which has already brought five reductions as inflation heads back to 2%. After the latest, in January, President Christine Lagarde said officials “will operate on the basis” of Friday’s paper to help determine what their policy stance should be, though she did highlight that it’s one of several factors under scrutiny. Since then, however, some of her colleagues have questioned the usefulness of neutral.

Earlier on Friday, chief economist Philip Lane warned against focusing too much on it, telling Bloomberg’s Odd Lots podcast that the threshold “loses some relevance” as borrowing costs near it.

In a speech this week, he listed nine factors to assess how restrictive ECB policy is — including transmission to the real economy and credit standards in bank lending.

In an interview with Bloomberg Television, Croatian central-bank shared similar sentiments.

“It’s a useful theoretical concept to think about, but not something that you would say, ‘okay, I know where it is and that’s where I want to get,’” he said.

The ECB’s paper updates an earlier estimate of neutral from January 2024 that put the upper end of the range at 2.5%. Many Governing Council members had referred to that paper when discussing how restrictive interest rates are.

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