Europe Neutral Interest Rate

[I Told You So]

If we assume that the UK's neutral IR is around 5.5% to 6.0% has anyone got any idea what the Eurozone neutral rate is?

Just a thought as it might give some idea of how far the ECB have to go.

[OzzMosiz]

If we assume that the UK's neutral IR is around 5.5% to 6.0% has anyone got any idea what the Eurozone neutral rate is?

Just a thought as it might give some idea of how far the ECB have to go.

Dunno, wouldn't it be hard to tell considering how young the ECB is?

[Madrid Dude]

It depends. Here in Spain a neutral rate would be somewhere north of 5%. In countries where growth and inflation are lower the rate may also be lower. Of course that's one of the problems with a single monetary policy. Spain has out of control inflation and HPI due to overly low rates while Germany is still trying to get its economic engine working again...

[IMupNorth]

It depends. Here in Spain a neutral rate would be somewhere north of 5%. In countries where growth and inflation are lower the rate may also be lower. Of course that's one of the problems with a single monetary policy. Spain has out of control inflation and HPI due to overly low rates while Germany is still trying to get its economic engine working again...

And we all know that Europe and the Euro were set up for the benefit of France and Germany !

Thats why the UK is best out of it, for the time being at least !

Just think what would happen if UK interest rates fell to 2.5% !!!

Ahh, but isn't that the Governments medium term objective to join the Euro ......... mmmm, there may be trouble ahead ..........

[George Mainwaring]

Mr Clown won't join the Euro. One of the very few things he's got right.

[ILikeBigBoobs]

If we assume that the UK's neutral IR is around 5.5% to 6.0% has anyone got any idea what the Eurozone neutral rate is?

Just a thought as it might give some idea of how far the ECB have to go.

Neuteral UK rate is probably somewhere in the region of 5% to 5.5% according to MPC member Paul Tucker, with the Eurozone's neutral rate being 2 to 3%.

[BoredTrainBuilder]

If we assume that the UK's neutral IR is around 5.5% to 6.0% has anyone got any idea what the Eurozone neutral rate is?

Just a thought as it might give some idea of how far the ECB have to go.

Why should the UK's neutral rate be 5.5 or 6%? There is no real inflation in the economy even at the lower rates of recent years - the only real exception being fuel which affects the UK less than other countries. In fact, since the UK's economy is more flexible than the Eurozone the interest rate here could be sustainably lower than over there.

Edited March 2, 2006 by BoredTrainBuilder

[I Told You So]

Why should the UK's neutral rate be 5.5 or 6%? There is no real inflation in the economy even at the lower rates of recent years - the only real exception being fuel which affects the UK less than other countries. In fact, since the UK's economy is more flexible than the Eurozone the interest rate here could be sustainably lower than over there.

I seriously douby that, what are we some sort of separate entity unaffected by world events surely idf inflation is rising everywhere eslse at some point we will be effected.

Another point I seriously think that the BoE and GB will have no qualms in moving IR's to neural level as they believe it wont be high enough to cause a HPC. how wrong they will be

[ILikeBigBoobs]

Why should the UK's neutral rate be 5.5 or 6%? There is no real inflation in the economy even at the lower rates of recent years - the only real exception being fuel which affects the UK less than other countries. In fact, since the UK's economy is more flexible than the Eurozone the interest rate here could be sustainably lower than over there.

Perhaps because - Quote : "There is little account taken of housing in the UK CPI (consumer price index)measure. If we adjust UK inflation by some measure of housing costs we get an altogether different view of UK real rates. If we look at official rates relative to the old measure of UK inflation (which includes housing) we see that UK real rates have been low (1.5% rather than 3.2%)."

So, presumably, the inflation rate would have been running at arount 1.7% higher than official figures suggest (if housing inflation were still included ). Which may not be the case in the Eurozone as a whole and may help to explain the difference?

[martinipaul]

I thought the accepted definition of 'neutral' interest rate was more a neutral interest rate 'band' of around +/-10% centred at a rate that equalled the inflation rate + the GDP growth rate.

So, example, if the inflation rate for a country was 2.5% and GDP growth rate was 2.5%, the 'neutral' interest rate would be 5% +/- 0.5%, i.e. within the range 4.5% to 5.5%

I seem to remember reading this in a Roger Bootle column some time ago

[BoredTrainBuilder]

I seriously douby that, what are we some sort of separate entity unaffected by world events surely idf inflation is rising everywhere eslse at some point we will be effected.

I agree, my point is about relative interest rates. I see no structural reason why the UK's rate need to be double the Eurozone's. But what do I know?

I thought the accepted definition of 'neutral' interest rate was more a neutral interest rate 'band' of around +/-10% centred at a rate that equalled the inflation rate + the GDP growth rate.

So, example, if the inflation rate for a country was 2.5% and GDP growth rate was 2.5%, the 'neutral' interest rate would be 5% +/- 0.5%, i.e. within the range 4.5% to 5.5%

I seem to remember reading this in a Roger Bootle column some time ago

No, it's the IR at which GDP growth can take place at the trend rate without there being inflationary pressure. So if GDP growth is at trend and there is inflation, IRs need to rise. If growth is below trend and there no inflationary pressure the economy can safely be stimulated by dropping IRs. I think.

[George Mainwaring]

Don't France and Germany have credit controls? So since they are not relying on the interest rate alone to control debt levels it can be lower than ours?

[lowrentyieldmakessense(honest!)]

Don't France and Germany have credit controls? So since they are not relying on the interest rate alone to control debt levels it can be lower than ours?

credit controls

how foolish

[non-FTBer]

It depends. Here in Spain a neutral rate would be somewhere north of 5%. In countries where growth and inflation are lower the rate may also be lower. Of course that's one of the problems with a single monetary policy. Spain has out of control inflation and HPI due to overly low rates while Germany is still trying to get its economic engine working again...

Spain also has out of control HPI in part due to British expats who want to retire somewhere the weather won't affect their arthritis so much.

[Madrid Dude]

Yes, it's said that Brits and Germans will pay as much as 20% more for a home than a Spaniard. I've also been told that many developments don't even want to know about you if you're not foreign- they know who their target market is. In addition, I'm told that the style of home purchased by foreigners is different from what the Spanish like- so if the market turns foreign investors may not find it too easy to find local buyers...