ECB’s Villeroy: ‘Must Choose the Rate Trajectory That Will Minimise the Economic Cost’

15 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Wednesday said that ECB interest rate cuts must consider the impact on economic activity.

Speaking at the Finance Commission of the French National Assembly, Villeroy, who heads the Banque de France, said, ‘Once we have confidence in arriving at our destination, we must choose the rate trajectory that will minimise the economic cost.’

‘As we emerge from the inflationary emergency, we must rediscover a longer-term ambition to strengthen the French and the European growth’, he said.

The economic scenario was in a transition phase and ‘we are gradually emerging from the inflationary crisis and we are going to reverse the rate cycle', he said.

There were two pieces of good news on the economic outlook, namely that the victory against inflation was in sight and that disinflation would support activity.

‘I confirm here our forecast, and our commitment: there will perhaps be short-term variations in inflation in the months to come, but we will bring inflation down to 2% by next year the latest’, he said.

After the first interest rate cut, which would likely happen in June, Villeroy argued for a pragmatic and gradual approach and rejected the idea that the ECB’s decisions were somehow dependent on the US Federal Reserve's.

‘I then plead for pragmatic and agile gradualism: the pace of reductions will be decided at each meeting and will be guided by European data and forecasts’, he said.

This would allow for ‘significant room for manoeuvre before returning to an overly accommodating policy’, he said, adding that the Banque de France estimated the neutral rate to be between 2% and 2.5% in nominal terms.

Answering questions from members of the Finance Commission, he said that the ECB did not have an austere monetary policy and noted that interest rates in the euro area, at 4%, were already ‘significantly lower’ than those in the United States, at 5.5%.