ECB’s Villeroy: Could Get Behind the Curve if We Wait Too Long to Cut Rates

28 March 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Thursday warned of the risk of getting behind the curve if the ECB waited too long reduce interest rates.

Speaking at House of Finance Days at the Paris-Dauphine University, Villeroy, who heads the Banque de France, said, ‘Monetary policy itself acts with a lag, so waiting too long puts us at risk of finding ourselves behind the curve.’

‘If inflation then fell persistently to below our target, there would be a risk of us having to cut interest rates further and more aggressively, or even finding ourselves once again stuck at the effective lower bound’, he elaborated.

While on the one hand the risks to inflation were balanced, on the other, risks to growth were on the downside, he said. ‘The time has come to insure against this second risk, by starting to lower rates.’

It was necessary to consider the effect that ‘keeping our foot pressed on the monetary brake for too long’ could have on activity and the potential risks to wellbeing, he said.

The 2% inflation target was in sight and it was now necessary to calibrate monetary policy with a gradual approach, Villeroy said.

‘Given the balance of risks, I advocate a policy of agile gradualism; then, once the first rate cut has been decided, we will have two less frequently mentioned but more important choices, regarding the speed of the fall and the landing zone.’

The first rate cut should come in the spring and independently from the Fed’s decision, he said, emphasising that the discussion about the precise month of the first move, April or June, was not that relevant.

When the time came to reduce interest rates, the pace of cuts would be pragmatic and guided by economic data, he said.

‘We will probably start with a moderate cut’, he said. ‘We will not then be obliged to cut rates at every Governing Council meeting, but we will need to keep that option open.’