The European Central Bank has cut interest rates from record highs twice already this year, and markets now expect a faster easing of monetary policy, with moves in October and December fully factored in as inflationary pressures ease faster than policymakers expected.
“Yes, most likely,” Villeroy told La Repubblica newspaper when asked if rates were scheduled to be cut this month.
The Italian newspaper quoted Villeroy as saying on Monday, “In the past two years, the main risk we faced was inflation exceeding the target of 2 percent. Now we must also pay attention to the opposite risk, which is exceeding our target due to weak growth and restrictive monetary policy for a very long period,” according to the agency. Reuters.
Last week, European Central Bank President Christine Lagarde gave the strongest hint yet that an October interest rate cut is coming and policymakers have been lining up behind it ever since.
Villeroy predicted further cuts in the 3.5 percent deposit rate next year and said the ECB should return to a “neutral” rate, which neither slows nor stimulates growth, at some point in 2025.
“If next year we are at a sustainable inflation rate of 2 percent, and with continued slow growth expectations in Europe, there will be no reason for our monetary policy to remain restrictive and for our rates to be above the neutral interest rate,” Villeroy said.
Villeroy did not estimate neutral interest rates, but said markets had put it at around 2 percent, suggesting six more cuts by then, including two more this year and four in 2025.
Although oil prices rose last week due to unrest in the Middle East, Villeroy said that the European Central Bank tends to ignore such shocks, provided that they are temporary and do not feed into underlying prices.
Villeroy added: “Victory against inflation seems to be on the horizon, but this is no reason to be complacent and relax on a pre-determined path.”
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