(Bloomberg) — The European Central Bank should remain flexible as it cuts interest rates in response to cooling inflation and a weakening economy, according to Governing Council member Francois Villeroy de Galhau.
Most Read from Bloomberg
Speaking less than a day after policymakers lowered borrowing costs for the third time this year, the Bank of France head cited the current unpredictable nature of geopolitics, as well as now equal risks of over- and under-shooting the 2% inflation goal.
“The direction is clear in my eyes — we should continue to reduce the restrictive character of our monetary policy in an appropriate manner,” he told journalists in Paris. “But the rhythm should be one of agile pragmatism. In a very uncertain international environment, we maintain total optionality for our coming meetings.”
After accelerating the pace of easing, President Christine Lagarde was tight-lipped on Thursday regarding the ECB’s next steps. Markets, though, are betting on a spate of cuts at the next few meetings — starting in December, when some investors reckon a larger half-point move may be in play with inflation having already sunk to 1.7%.
Asked about the pace of easing, Irish central bank chief Gabriel Makhlouf rejected the notion that — given the economics difficulties of the region — the ECB could have accelerated its rate cuts.
“I certainly don’t think we should have gone faster,” he told the Irish Examiner. “My own sense is that there certainly have been some surprises, but I think the nature of what we’re seeing, in my view, is more structural problems.”
Officials see price gains picking up again in the months ahead before settling at 2% in the first or second quarter of 2025, according to people familiar with the matter. Another cut at the final gathering of the year is highly likely, they said.
“It’s not the first rate cut and it won’t be the last,” Villeroy said of this week’s decision, adding that “we should reach our 2% goal earlier than predicted in 2025.”
The French central banker said that “in future, we clearly restated that we’d decide based on data — beyond the volatility of the next monthly figures and including advanced indicators and our forecasts.”
Commenting earlier in a blog post, Estonian central-bank chief Madis Muller said inflation is headed for 2% as the region’s economy falters. But he warned that upside dangers to prices persist.
“There’s still a risk that the still rather rapid increase in the price of services and the related average-wage increase may keep inflation in the euro area faster than the ECB’s target,” he said.
The slow pace of economic recovery, especially in Germany and France, “confirms the belief that the central bank no longer needs to keep interest rates at their current levels to permanently slow the rise in prices,” Muller said.
Robert Holzmann, traditionally among the ECB’s more hawkish members, said late on Friday that inflation is headed in the right direction despite projections for an uptick in the coming months.
“Inflation is on the right path, but it doesn’t yet mean that the only path is downward,” he told public broadcaster ORF in an interview.
His Slovenian counterpart, Bostjan Vasle, was also optimistic.
“Everything points to the process of disinflation being more robust,” he told RTVSLO radio. “We expect inflation to swing slightly upward in the coming months before returning to a gradual downward path again next year.”
He downplayed concerns about the state of the euro-area economy, saying that “at the moment, we can’t talk about recession, but a slowdown in growth.”
Professional forecasters also see no slump, though their outlook for gross domestic product in 2025 has worsened a touch, according to the ECB’s quarterly survey of professional forecasters, released Friday.
Inflation will dip to 1.9% next year and hold at 2% in the longer term, the poll found.
Still, Ireland’s Makhlouf warned that some factors impacting consumer prices can’t be influenced by the ECB.
“There are sort of big risks that we can’t control out there,” he said. “The whole geopolitical side is riskier than ever in some respects, and that could have effects that we can’t control. We just need to keep an eye out.”
–With assistance from Ott Tammik, Alexander Weber, Jan Bratanic, Olivia Fletcher, Isolde MacDonogh and Marton Eder.
(Updates with Holzmann starting in 13th paragraph)
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.
