ECB’s Villeroy: If Inflation Falls as Expected, Should Be at Neutral by Summer

8 January 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau said on Wednesday that the ECB could lower rates to neutral territory if inflation eased as expected in the following months.

In a New Year's address in Paris, Villeroy, who heads the Banque de France, said that ‘the slight increase [of inflation] in December was expected and does not call into question our continuing victory over inflation.’

For Villeroy, the most probable ‘expectation’ for 2025 is that rates will keep falling.

The ECB had lowered rates more than its peers from the Bank of England or the Federal Reserve, but neutral territory, estimated at 2% by the ECB, was still much lower, he said.

‘If the fall in inflation is confirmed over the next few quarters as we expect, good sense dictates that we move steadily towards this neutral rate by next summer,’ he added.

On France, Villeroy acknowledged the country was still suffering from a ‘chronic illness’ regarding its public finances.

‘[W]e must return this year to a deficit as close as possible to 5% of GDP, and clearly below 5.5%,’ he said. ‘We also need to set a medium-term target of a 3% deficit in 2029.’

Though the government may try to achieve this objective first by increasing targeted taxes, it should control spending in a more efficient and effective way in the long run, he said.

‘The facts are clear: Europe has effective levers for controlling its economic future and strengthening its growth, but if it doesn't wake up and act now, it risks a long period of economic slumber,’ he stated.