What is the ECB’s “terminal” interest rate?

We seek to determine to what level (for the euro repo rate) the ECB will raise euro-zone rates. This depends on how fast core inflation falls: the ECB probably cannot accept core inflation in the euro zone above 2% at the end of 2024. From the ECB's latest forecasts, it can be inferred that it expects inflation excluding energy and food to be 2.6% at the end of 2024 (interpolated from the ECB's forecast of 2.8% in 2024 and 2.4% in 2025). Note also that this inflation forecast is based on very optimistic expectations of productivity gains. The ECB would therefore need to reduce core inflation by 60 basis points by the end of 2024. Our econometric estimates therefore lead us to expect a 240 basis point hike from the current level of the repo rate, i.e. a repo rate stabilised at 4.9%. We conclude that the ECB must at least raise its key interest rate by 200 basis points (to 4.5% at the end of the first half of 2023) to bring inflation close to the inflation target by the end of 2024, with an estimated lag of the impact of monetary policy on core inflation of 1 to 1.5 years. This required hike in interest rates in the euro zone will be greater if productivity gains remain virtually zero, as in 202 2 .