Update: ECB's Villeroy: Should 'Quite Probably' Expect an October Rate Cut

7 October 2024

By Marta Vilar – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Monday confirmed that the Governing Council was likely to cut interest rates at its next monetary policy meeting.

In an interview with Italian daily la Repubblica, Villeroy, who heads the Banque de France, was asked whether, in the context of anemic growth, the ECB could be expected to ease monetary policy in October.

‘Yes, quite probably, as President Lagarde hinted in the European Parliament last Monday’, he replied. ‘But not exactly for the reason you mention: our compass for monetary policy and rate cuts is first and foremost inflation, which again surprised on the downside and fell below 2% in September, at 1.8%.’

Though core inflation was now still at 2.7% and ‘stickier’ services inflation at 4%, Villeroy said that core inflation should slowly decrease to around 2% in 2025.

‘Market expectations for inflation in 2025 are even lower than our forecast, below 1.8%. All this means that the balance of risks is shifting’, he observed.

The major threat for the ECB since 2022 had been overshooting inflation, but now attention should shift to undershooting, which could come as a consequence of subdued economic activity and a long-lasting tight monetary stance, he noted.

‘Another measure of this risk is to look at the options market: the probability of being above 2.5% inflation in the next five years is now only at 17% while the probability to be below 1.5% is 38%, so more than double’, he said.

Though victory in the fight against inflation was near, this should not lull the ECB into complacency and relaxation regarding a ‘preset course’, he observed.

Villeroy revealed that at the September Governing Council meeting, he had advocated maintaining ‘full optionality’ for the October decision, ‘and rightly so’, he said.

‘I will not today change my mind and abandon a pragmatic approach, meeting by meeting, which by the way never meant for me quarter by quarter’, he said.

Regarding the recent spike on oil prices due to mounting tensions in the Middle East, Villeroy argued that this price increase should not impact the ECB’s monetary policy if it remained temporary and did not affect core inflation.