Eurozone rate-setters have urged economists to stop fixating on the so-called neutral rate, warning that the measure was “not a good guide” to what will happen to borrowing costs in a region increasingly exposed to weak growth and global uncertainty.
After five interest rate cuts, economists are becoming fixated on when the European Central Bank hits neutral — a goldilocks level at which borrowing costs neither stimulate, nor constrain, economic activity. They think reaching this level could lead policymakers to keep borrowing costs on hold — or delay further reductions.
But with the outlook for the Eurozone weakening fast, officials argue that hitting a level consistent with this crucial, but theoretical, benchmark matters less than economists think.