THE European Central Bank (ECB) will “quite probably” cut interest rates at its next meeting later this month, according to Governing Council member Francois Villeroy de Galhau.
Inflation fell below the ECB’S 2 per cent target in September and the core measure of price increases should gradually recede close to that level in 2025, the Bank of France chief said.
He also said that market expectations for inflation in 2025 are below 1.8 per cent – even lower than the ECB’s forecast.
“All this means that the balance of risks is shifting,” he said. “In the last two years, our main risk was to overshoot our 2 per cent target. Now we must also pay attention to the opposite risk, of undershooting our objective due to a weak growth and a restrictive monetary policy for too long.”
The French central bank chief has been quiet on ECB policy in recent weeks, a period during which expectations for a rate cut at the Oct 17 decision have gone from near-zero to almost certain.
Immediately after the ECB last reduced borrowing costs at its Sep 12, Villeroy said policymakers should continue with a gradual approach, but be as careful not to undershoot as to overshoot the 2 per cent inflation target.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
“I argued strongly in our last Governing Council to keep full optionality for October, and rightly so,” Villeroy said in the Repubblica interview published on Monday (Oct 7). “I will not today change my mind and abandon a pragmatic approach, meeting by meeting.”
Since the September meeting, data has shown the first below-2 per cent inflation reading in more than three years and surveys have pointed to a deterioration in activity economic. Investors are now pricing an around 90 per cent chance of a rate reduction in October.
Asked whether the ECB could become more aggressive with loosening policy, Villeroy said that if the central bank is meeting its target it should not have rates above neutral – an undefined, theoretical level that neither stimulates or holds back the economy.
“If we are next year sustainably at 2 per cent inflation, and with still a sluggish growth outlook in Europe, there won’t be any reason for our monetary policy to remain restrictive,” he said.
Villeroy also played down the risk to inflation should oil prices jump due to tensions in the Middle East.
“We should monitor carefully this very volatile situation,” he said. “But as long as it would be temporary and not spilling over to core inflation, an increase in oil price shouldn’t necessarily change our monetary policy.” BLOOMBERG
