The equilibrium real interest rate, often termed the natural rate, is the inflation-adjusted policy rate compatible with balanced economic conditions: output is close to its sustainable level and inflation remains stable at the desired rate. Because it cannot be observed directly, estimates vary and are revised as economic data and methods change. Weaker productivity growth, demographic shifts and increased investor preference for safe, liquid assets have been associated with a lower rate in recent decades. A reduction in this benchmark also lowers the level of nominal interest rates normally consistent with stable conditions. Conventional monetary policy then has less room to respond to weak demand or falling inflation before rates approach their effective lower bound.
Source: European Central Bank (ECB) (source). This glossary entry is an independently worded adaptation of the cited information.