The European Central Bank (ECB) should neither rush nor procrastinate over future interest rate cuts after its decision to cut rates for the first time since 2019 last week, stated Bank of France governor Francois Villeroy de Galhau.
With speculation rising regarding the ECB’s next move after its expected reduction in borrowing costs last week, the French central bank governor expressed a different opinion from his European counterparts who have called for more caution before cutting rates again.
“I plead for a pragmatic gradualism, both on the timing, without haste nor procrastination,” Villeroy said in a speech at the Paris Finance Forum on Tuesday.
Last week, the ECB cut interest rates to 3.75 percent from 4 percent, where they have been since September 2023.
Inflationary challenges remain
Despite the ECB cutting interest rates, inflationary challenges, stronger-than-expected wage growth and consumer prices remain challenges to Europe’s economy.
ECB president Christine Lagarde said the move to cut interest rates was justified. However, she added that the decision does not mean rates are now on a linear declining path. Echoing that sentiment, Lithuanian central bank chief Gediminas Simkus said on Tuesday that “it is too early to raise a victory flag” on inflation.
For his part, Villeroy revealed that in future meetings, the ECB will look through volatility in inflation readings, due partly to the impact of recent energy price fluctuations.
Notably, the Eurosystem staff has revised its latest projections for both headline and core inflation up for 2024 and 2025. The staff now see headline inflation averaging 2.5 percent in 2024, 2.2 percent in 2025, and 1.9 percent in 2026. Meanwhile, they expect inflation excluding energy and food to average 2.8 percent in 2024, 2.2 percent in 2025, and 2.0 percent in 2026.
Read: Japan’s economy contracts by 1.8 percent in Q1 2024, slightly better than expected
Fed’s policy impact
Regarding the impact of the Federal Reserve’s policy trajectory, Villeroy said: “U.S. monetary policy on balance should not greatly affect that of the euro area.” He added that the ECB and Fed’s settings can also differ because the theoretical level of the neutral interest rate that can achieve price stability is around 1 percentage point higher in the U.S. than in the euro area, where it is estimated between 2 percent and 2.5 percent.
Noting that the ECB’s deposit rate is at 3.75 percent, he said: “We have significant leeway to lower our rates before exiting restrictive territory.”
Villeroy reiterated his stance on capital markets, calling on governments and regulators to bolster the capital markets union to help close the investment gap behind the U.S. Moreover, he called for removing national obstacles to the creation of large financial institutions that could better compete with American rivals.
“We should not fear bigger, cross-border European banks, we should foster bigger, pan-European banks,” he said.
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