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ECB: Neutral Range Widens To 1.75-3.00% If HLW Model Included

ECB
BundesbankCentral Bank NewsFixed Income BulletsCEEMEAEurozoneGermanyBulletMarketsEuropean Central BankForeign Exchange Bullets

As expected, the ECB’s bulletin on r* concludes that “the inherent uncertainties as well as conceptual shortcomings limit the usefulness of available natural rate estimates for conducting monetary policy in real time”.

  • Most of the paragraphs in the bulletin are dedicated to caveats and measurement uncertainties around r*.  You have to get halfway through the piece before the first reference to the 1.75-2.25% nominal range is cited.
  • Even then, the 1.75%-2.25% excludes estimates derived from the Holston-Laubach-Williams (HLW) model, because an estimate for Q4 2024 using this model is not yet available.
  • When including the latest HLW estimates (i.e. as of Q3 2024), the corresponding nominal neutral range widens to 1.75-3.00%. Both ranges should be “viewed as merely indicative”.
  • Overall, the bulletin underscores recent Executive Board communication playing down the importance of r* in the near-term.
  • At the time of writing, ECB-dated OIS price 86bps of easing through year-end, implying a deposit rate of 1.89%. A 25bp cut remains fully priced through March.

 

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As expected, the ECB’s bulletin on r* concludes that “the inherent uncertainties as well as conceptual shortcomings limit the usefulness of available natural rate estimates for conducting monetary policy in real time”.

  • Most of the paragraphs in the bulletin are dedicated to caveats and measurement uncertainties around r*.  You have to get halfway through the piece before the first reference to the 1.75-2.25% nominal range is cited.
  • Even then, the 1.75%-2.25% excludes estimates derived from the Holston-Laubach-Williams (HLW) model, because an estimate for Q4 2024 using this model is not yet available.
  • When including the latest HLW estimates (i.e. as of Q3 2024), the corresponding nominal neutral range widens to 1.75-3.00%. Both ranges should be “viewed as merely indicative”.
  • Overall, the bulletin underscores recent Executive Board communication playing down the importance of r* in the near-term.
  • At the time of writing, ECB-dated OIS price 86bps of easing through year-end, implying a deposit rate of 1.89%. A 25bp cut remains fully priced through March.

 

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