The European Central Bank is about to unveil important clues regarding the extent of interest rate cuts, with the latest estimate of the neutral interest rate to be revealed on Friday

The Zhitong Finance APP has learned that the European Central Bank (ECB) is about to provide a crucial piece of information in the debate regarding the direction of interest rates in the Eurozone. The latest estimate of the neutral interest rate will be released on Friday. The neutral interest rate is a theoretical level that neither restricts nor stimulates economic demand. ECB President Christine Lagarde has stated that policymakers will act based on this report to help determine "what our monetary policy stance should be."

Negotiations on how to address borrowing costs are intensifying after the deposit rate was cut five times to 2.75%. Given that inflation is expected to reach 2% this year, officials unanimously agree that further rate cuts are likely, especially in light of the stagnation in the region's economy. However, there remains controversy over where the optimal point lies.

Although Lagarde herself has set the neutral range between 1.75% and 2.25%, this week's research may further clarify the ECB's landing zone.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, stated, "The debate within the ECB Governing Council regarding the neutral interest rate is heating up." "While the concept itself has limited utility in determining monetary policy, it can be effectively used to manage expectations, and in this regard, we will closely monitor what happens next."

About a year ago, as inflation began to decline, rate cuts seemed imminent, and officials started considering the neutral interest rate. Since then, hawkish committee member Isabel Schnabel has presented some of the most comprehensive views, arguing that recent crises and structural changes may push the neutral rate up to between 2% and 3%.

Other officials believe this figure should be lower. Olli Rehn, Governor of the Bank of Finland, cited a study from his central bank suggesting that rates should be between 2.2% and 2.8%, while Francois Villeroy de Galhau, Governor of the Bank of France, and Yannis Stournaras, Governor of the Bank of Greece, both believe it should be around 2%. Mario Centeno, Governor of the Bank of Portugal, even suggested that the figure should be lower.

Lagarde's narrow forecast range has raised questions about whether she may have inadvertently revealed the content of the ECB's upcoming report. This would indicate that the midpoint of the deposit rate is 2%, a level that many investors and economists believe the deposit rate will ultimately reach.

The "corridor" suggested by Lagarde may also allow the ECB to postpone discussions on when to stop describing the current policy as restrictive—such wording implies that more rate cuts are forthcoming.

However, in recent days, some officials, including Chief Economist Philip Lane, have expressed doubts about the idea that the neutral interest rate should serve as a guiding star for curbing inflation while preventing economic collapse. Gediminas Simkus of the Bank of Lithuania and Gabriel Makhlouf of the Central Bank of Ireland believe that, as a difficult-to-determine theoretical concept, the neutral interest rate should not play an overly significant role in day-to-day decision-making On the contrary, they tend to focus on inflation prospects, potential price pressures, and the impact of past actions on the financing environment and demand. Vice President Luis de Guindos pointed out that the European Central Bank's bank lending survey is a better indicator of constraints. In an interview on Wednesday, he said, "While the neutral interest rate is an interesting academic concept, it is not very useful from a policy-making perspective."

Other central banks have varying attitudes towards the neutral interest rate. The Bank of England has largely avoided the topic, which has only come up in public discussions twice recently. In December of last year, policymaker Swati Dingra stated that she expected rates to fall within a neutral range of 2.5% to 3.5%. In the following month, the newest member of the Monetary Policy Committee, Alan Taylor, adjusted the rate to around 2.75%.

In contrast, the Federal Reserve's quarterly economic forecasts include long-term estimates for the federal funds rate, which is currently expected to be 3%.

The borrowing costs in the U.S. are at 4.25% and 4.5%, still some distance from neutral levels. However, the situation is different for the European Central Bank, and Schnabel may be one of the first to suggest that this level may have already been reached this year.

She stated in January, "After significant rate cuts in recent months, we are getting closer to a moment where we must consider more carefully whether we can still cut rates and to what extent we can do so."