• ECB board member Olaf Sleijpen said that even if the central bank were to raise rates to 2.5%, policy would remain in neutral territory based on current analysis.
  • The comments suggest the ECB sees limited risk of overheating or persistent inflation, reinforcing a cautious stance.
  • Markets are now pricing in a lower probability of further tightening, with focus shifting to the timing of potential cuts.

Neutral Rate Debate Intensifies

European Central Bank board member Olaf Sleijpen said on Thursday that a hypothetical rate hike to 2.5% would still leave policy in the neutral range, according to remarks at a conference in Frankfurt. "If there was another rate hike to 2.5%, we would still be in neutral range based on current analysis," Sleijpen stated, according to people familiar with the matter.

The comments underscore the ongoing debate among ECB policymakers about where the neutral rate lies—the level that neither stimulates nor restricts economic growth. Sleijpen's assessment implies that the central bank sees limited urgency to tighten further, even as inflation remains above its 2% target.

Market Reaction and Forward Guidance

Bond yields edged lower after the remarks, with the German 10-year Bund yield falling 3 basis points to 2.45%. The euro also weakened slightly against the dollar. Investors interpreted the comments as dovish, reducing bets on another rate hike this year.

"Sleijpen's remarks suggest the ECB is comfortable with current policy settings," said a chief investment officer at a major asset manager, speaking on condition of anonymity. "They are signaling that any further moves would be data-dependent and not pre-committed."

The ECB has held its deposit rate at 2.0% since October, following a series of cuts from a peak of 4.0%. The central bank has emphasized a meeting-by-meeting approach, with future decisions hinging on incoming data.

Implications for Borrowers and Savers

The neutral rate assessment has direct implications for households and businesses. If the ECB views current rates as neutral, it may be less inclined to cut aggressively, even as growth stagnates. German mortgage rates, which have fallen from recent highs, could stabilize. Savers, meanwhile, may continue to enjoy positive real returns on deposits.

However, Sleijpen also cautioned that the neutral rate is not fixed and could shift with economic conditions. "The neutral rate is a moving target," he said. "We need to reassess it constantly."

Forward Outlook

Analysts expect the ECB to hold rates steady at its next meeting in April, with a potential cut in June if inflation continues to moderate. Sleijpen's remarks reduce the likelihood of a surprise hike, but do not rule out action if wage growth or services inflation prove sticky.

Correction: An earlier version of this article misstated the location of the conference. It was in Frankfurt, not Milan.