(Bloomberg) — The European Central Bank doesn’t need to constrain the economy any longer and may even have to take interest rates to levels that promote growth, according to Governing Council member Francois Villeroy de Galhau.
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While it’s too early to tell where borrowing costs will settle, there’s “significant room” to ease before they stop weighing on output, Villeroy said in a speech in Paris. Another reduction in December is all but assured, and officials should keep all options open on the speed and size of cuts over the coming months, he said.
“As we should be in the near future sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reasons in my view for our monetary policy to remain restrictive,” Villeroy said Thursday. Going even further could be an option “if growth were to remain subdued and inflation at risk of falling below target.”
Money markets increased wagers on the extent of rate cuts next year, with about 150 basis points in total expected — four basis points more than the previous day. The German 10-year bond yield fell to 2.13%, the lowest since early October, while French and Italian bonds outperformed.
The comments are the latest in an intensifying debate about how far rates will have to sink from the current 3.25% as business surveys signal worsening growth prospects and inflation approaches the 2% target earlier than previously foreseen. Even hawkish officials are in favor of moving rates toward the neutral level — a theoretical threshold that’s hard to observe in real time.
Still, Executive Board member Isabel Schnabel cautioned this week in a Bloomberg interview against going too far, as accommodative policy could prove ineffective if weak growth is caused by structural problems. Italy’s Fabio Panetta, by contrast, said last week that the ECB should be ready to move to such a stance if necessary.
Schnabel said neutral may be as high as 3%, as several factors risk keeping inflation well above the pre-pandemic pace. Villeroy reiterated the Bank of France’s estimate that it’s between 2% and 2.5%.
Investors and economists widely expect the ECB to cut rates for a fourth time at its final meeting of 2024. While they predict another quarter-point reduction, markets see a small risk of weak economic data pushing policymakers into a move of twice that size.
“Seen from today, there is every reason to cut on Dec. 12,” Villeroy said. “Optionality should remain open on the size of the cut, depending on incoming data, economic projections and our risk assessment.”
