ECB’s Villeroy: Interest Rates Likely to Remain Unchanged Next Few Quarters

21 November 2023

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Monday said that discussion of ECB monetary policy had shifted too fast from focussing on when tightening would end to asking when loosening would start and that the ECB would probably its keep interest rates at current levels for some time.

In a speech at the Society of Professional Economists in London, the text of which was published on the website of the Banque de France, which he heads, Villeroy said that 'the question too quickly shifted from “when will you stop hiking?” to “when will you start cutting?”'

‘Well, in a mountainous environment, there aren't just peaks and descents: there are also plateaus, where you can experience the effects of altitude and appreciate the view', he continued. 'That's what we'll probably be doing for at least the next several meetings and the next few quarters.’

For this reason, the next Governing Council meetings would be ‘a bit more boring’, he said. ‘But if this is synonym[ous] for somewhat reduced uncertainty and intelligent patience before future rate cuts, nobody should regret it.’

‘[A] return to an inflation outlook that is compatible with our 2% target, firmly and durably’ would be key to determine when to start cutting interest rates, he said.

There was a clear disinflationary trend developing faster than expected, he said, adding that the conflict in the Middle East should not significantly alter this.

‘[E]ach day we are moving further from a general commodity shock like in 2021-22’, he noted.

When facing unexpected shocks, the ECB should take what it learned from the past to avoid being ‘too rigid’, he said.

‘We cannot totally bind our hands with rules and should keep some discretion in addressing unexpected data or events. Central banks should be predictable, but not pre-committed’, he said.

Talking about the reinvestments under the pandemic emergency purchase program (PEPP), he said that the ECB ‘will have to discontinue our PEPP reinvestments in due time – and possibly earlier than end 2024.’

‘But I see no reason today to tie our hands on a specific order of sequencing between our future first rate cut and the end of the PEPP full reinvestments’, he said. ‘As long as our rates are in restrictive territory –which will clearly remain the case–, withdrawing past balance sheet expansion can be consistent with our overall monetary stance.’