We present a new measure of the short-term real interest rate in the euro area based on market indicators: overnight index swaps for nominal rates and inflation fixing swaps for inflation expectations. We use this measure to evaluate the ECB's monetary policy stance, defined as the difference between the real interest rate and its natural value (i.e., the long-run equilibrium real rate).
Based on the new measure, the ECB's monetary policy stance became neutral in September 2022 and has turned restrictive since the beginning of 2023. It has further tightened after the last policy rate hike of September 2023, due to the sharp decline in inflation, peaking in March 2024.
