ECB’s Villeroy: Risk of Waiting Too Long to Cut at Least as Big as Risk of Cutting Too Soon

16 February 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Friday said that the danger of waiting too long to cut interest rates was now at least as great as that of cutting them too early.

In an interview with French daily l’Echo, Villeroy, who heads the Banque de France, said that a reduction of interest rates this year was a certainty, and that everything depended on data regarding headline inflation, core inflation and monetary policy transmission.

‘On the first and third, we have sufficiently strong indicators of disinflation’, he said. ‘The question remains more open for the evolution of underlying inflation and expectations, even if this is encouraging.’

‘And we must chart the right path between two risks: either cut too soon with inflation starting to rise again, or wait too long and weigh excessively on activity’, he continued. ‘From now on, the second risk exists at least as much as the first.’

The last mile of disinflation wasn’t intrinsically harder, he said, and the disinflation was broad-based.

There would be no further forward guidance, but the freedom of the ECB to determine the timing, pace and extent of policy easing ‘can be a further argument for not delaying the first reduction excessively’, he said.

‘It’s not about rushing; but acting with gradualism and pragmatism may be preferable to deciding too late and then having to over-adjust’, he said.

As for wage data, these are ‘useful but delayed; other more forward-looking indicators must also be taken into account’, he said.

In France, labour market slack has been increasing, while nominal wage growth has been slowing, he said.