ECB’s Lane Says Upper Range of Neutral Has Crept Up to 2.5%

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(Bloomberg) — European Central Bank Chief Economist Philip Lane said the neutral rate of interest could be as high as 2.5%, suggesting another hike won’t yet act as a brake on the economy.

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Speaking on Thursday at an event hosted by Deutsche Bank AG, he suggested that the decision a week ago to raise borrowing costs may not have started constricting growth. 

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“We tightened last week from a position of firmly neutral,” Lane told the audience in Hertfordshire, north of London. “We look at a range of models of neutral, and the upper end of that range we think has crept up from 2.25 to 2.5.” 

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At the June 11 press conference following the ECB’s decision to hike for the first time since 2023, President Christine Lagarde insisted that she and colleagues didn’t debate the level of constriction, sometimes known as R*, when making its policy move. 

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But as with several of its peers, the theoretical question of what is neutral has often featured in ECB discussions in the past as officials wonder what level of borrowing costs neither brakes nor stimulates growth. 

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Lane’s assessment compares with analysis by ECB economists in early 2025 that put the overall range at between 1.75% and 2.25%.

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Analysts and markets are counting on one more move this year. Still, there have also been warnings that lifting borrowing costs will cause undue economic pain, with growth in the 21-nation euro zone already flagging.

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Lane described the outlook as “stable,” while observing that the price shock caused by the snarl-up in energy supplies from the Middle East isn’t yet over even if hostilities may have ceased. 

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“Even when the price of oil is falling now, the price of food, we think, will go up — and the price of goods and services,” he said. “So the overall inflation dynamic, we do think, is going to be a prolonged period of above-target inflation.” 

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His questioner, Deutsche Bank economist Mark Wall, asked him to compare current circumstances with the energy crisis following Russia’s invasion of Ukraine in 2022. 

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“I call this a medium shock, which has a medium level of persistence as well,” Lane said. “This is mid-size. Last time was large.”

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He also insisted that the ECB can set its own policy path without focusing too much on the actions of the US Federal Reserve. 

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“We will do what’s needed for our objective,” he said. “Of course we notice a spillover between the Fed and us, we take that into account. But let me say this: Spillovers go in both directions.”

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