Yannis Stournaras is the Governor of the Bank of Greece and thus a member of the European Central Bank Governing Council (monetary policy setting committee).
He spoke with Bloomberg on Friday ICYMI:
- “recent set of data suggests we will reach 2% in the autumn of this year.”
- “The latest deceleration in wages gives hope that we are on track. But we won’t have enough information to decide on rate cuts before the end of the second quarter – so June”
AND sees 25bp cuts continuing until late into 2025 when the Bank will reach a neutral rate level:
- “I would expect us to reach neutral levels – around 2% – toward the end of next year.”
The neutral rate of interest, often referred to as the “natural rate of interest” or r ∗ (r-star), is a concept in monetary economics. It represents the hypothetical interest rate at which the economy is neither expanding nor contracting, but instead operating at its full potential, or “equilibrium”. When the economy is at this point, both inflation and employment are stable, and monetary policy is neither stimulative nor contractionary.
Key points:
- The neutral rate of interest is a theoretical construct and is not directly observable. It can’t be measured with precision but can be estimated using various models.
- The neutral rate can change over time due to various factors, such as shifts in demographics, changes in technology, and global economic conditions.
- Central banks, like the European Central Bank, pay attention to estimates of the neutral rate. When the policy rate is above the neutral rate, monetary policy is considered contractionary, which can slow down the economy and reduce inflation. Conversely, when the policy rate is below the neutral rate, monetary policy is considered expansionary, which can stimulate economic activity and potentially increase inflation.
Factors Influencing the Neutral Rate:
- Productivity Growth: Higher productivity growth can increase the neutral rate because it boosts the economy’s growth potential.
- Demographics: An aging population can lower the neutral rate as older individuals might have a higher propensity to save and a lower propensity to invest.
- Risk Appetite: A higher appetite for risk in the economy can lead to more investment opportunities and can push up the neutral rate.
- Global Factors: In an interconnected world, factors such as global savings and investment patterns can influence the neutral rat
This article was written by Eamonn Sheridan at www.forexlive.com. Source