ECB’s Villeroy: Still Far Away From r*, We Have Room to Manoeuvre

25 October 2024

ECB’s Villeroy: Still Far Away From r*, We Have Room to Manoeuvre
François Villeroy de Galhau, governor of the Banque de France, at the ECB’s Governing Council meeting in Ljubljana on October 17, 2024. Photo by Andrej Hanžekovič/ECB.

By Marta Vilar – WASHINGTON (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Friday that even though the decades-long decline of r* had stopped, the neutral rate was still significantly lower than the current level of euro area interest rates.

In a panel discussion at the IMF annual meetings in Washington, Villeroy, who heads the Banque de France, said that ‘we are still quite far away from r*, so we still have room of manoeuvre.’

He did not give a specific estimate of where the neutral rate could lie. ‘We should be cautious in using it with precise figures’, he said.

The 20-year decline seen in r* had been halted and the neutral rate had ‘stabilised’, he said.

Regarding the ECB’s upcoming strategy review, Villeroy said that ‘there could be a temptation to say you should change the inflation target’ and raise it above 2%.

‘I think it [would] be a mistake’, he stated.

Other central banks were flexible in terms of the time in which the inflation target should be reached, he observed. ‘This is really for me for the next strategy review’, he said.

Villeroy described himself as 'fully aligned' with ECB President Christine Lagarde regarding where borrowing costs were headed.

'The direction of the journey is clear', he said. 'We have room to cut rates, obviously, and we will, but the pace will be highly pragmatic and data-dependent.'