ECB’s Villeroy: Risk of Acting Too Late Now as Significant as Acting Too Soon

27 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Monday said that there was a growing risk to economic activity from waiting too long to start easing monetary policy.

In an interview with German financial daily Börsen-Zeitung, Villeroy, who heads the Banque de France, said, ‘Beside the risk of easing prematurely and missing our inflation target from above, the risk of cutting too late and missing the target from below is now at least as significant: Europeans would then pay a too high price in terms of economic activity and employment.’

The first interest rate cut in June was ‘a done deal’, barring a surprise, he said, adding that ‘afterwards we have several degrees of freedom’ to decide on future interest rate cuts.

‘I plead for maximum optionality and agile gradualism after our first June cut’, he said. ‘I sometimes read that we should cut rates only once a quarter when new economic projections are available, and hence exclude July. Why so, if we are meeting-by- meeting and data-driven? I don't say that we should commit already on July, but let us keep our freedom on the timing and pace.’

The ECBS’s monetary policy would still be in a restrictive territory after a 50bp reduction in interest rates, he said, adding that there was no reason to think that it would be more difficult to cut rates after that.

The neutral interest rate estimates ranged between 2% and 2.5%, he said. ‘This doesn’t mean that we should go to this rate, but that with a deposit facility rate of 4%, we have significant room for rate cuts’, he said.

Nominal wages were decelerating in the lager euro area economies and the latest Q1 data were a temporary acceleration resulting from one-off payments in Germany, he said.

Services inflation was a more relevant indicator than wages or margins as it was the main contributor of underlying inflation, which was the ECB’s focus, he said.

‘It could be a bit stickier, although it has already decreased from a peak at around 5.5% in the summer 2023 to 3.7% in April 2024’, he said. ‘I don’t think the last kilometer of disinflation is more difficult in nature, but it could be somewhat slower.’

Asked about the influence of the United Stated Federal Reserve’s monetary policy on the ECB, he said that the Fed’s decisions ‘should not affect our own monetary policy that much.’

‘If the dollar strengthens about 1% against the euro, it increases the euro area price index by less than 0.1%’, he said. ‘According to a study of the Banque de France the pass-through could even be smaller, around 0.05 pp.’