ECB: Lagarde Does Not Comment On r-star

Q: How many times can the ECB cut interest rates before they are no longer sufficiently restrictive i.e. where do you see the neutral rate? How much of a boost could such cuts deliver to the euro area economy given that most of the problems are structure?

A1: No Comment On r-star

• "How long are we going to be sufficiently restrictive? Until we have been sufficiently restrictive. We have inflation at target in the second half of 2025 and that is on the basis of our baseline and we will observe how that baseline evolves as data comes in".
• "This will determine how longer we have to continue cutting rates and at what point we have been sufficiently restrictive. I won’t give you an idea of where r-star is and is it is unobservable. As we get closer to it, we will have a better idea of where it is".
   

A2: Current Data Reflect Past Tightening

• "Obviously there is a lag between the time when we make a decision and the impact is felt and observed in the economy. What we still observe at the moment is the impact of the previous tightening decisions".
• "We believe that the peak [of transmission] has been reached in terms of GDP but there will continue to be downward sloping effects of those decisions. We will have the same type of lag to cutting rates".
• "The Draghi report is formidable. It points to structure reforms and practical proposals that could help Europe to be stronger and for the ECB to improve its performance. If the capital market union can be implemented and more financing made available for innovation, that is good news for the ECB when it comes to price stability".