FRANKFURT (Reuters) – The European Central Bank will likely cut interest rates on October 17 as economic growth weakens and that raises the risk that inflation will fall below its 2% target, French central bank President Francois Villeroy de Galhau told an Italian newspaper.
The European Central Bank has cut interest rates from record levels twice already this year, and markets now expect a faster policy easing with moves in October and December fully priced in as inflationary pressures ease faster than policymakers expected.
“Yes, most likely,” Villeroy told La Repubblica newspaper when asked if the cut would come this month.
“In the last two years our main risk has been exceeding our 2% target,” Villeroy was quoted as saying on Monday. “Now we must also pay attention to the opposite risk, that we will miss our target due to weak growth and restrictive monetary policy for too long.”
European Central Bank President Christine Lagarde gave the strongest hint yet last week that an October rate cut is coming and policymakers have been lining up behind her ever since.
Villeroy predicted further deposit rate cuts of 3.5% next year, and said the ECB should return to a “neutral” rate, which neither slows nor stimulates growth, at some point in 2025.
“If next year we are at a sustainable inflation rate of 2%, and growth expectations in Europe continue to slow, there will be no reason for our monetary policy to remain tight and for our interest rates to be above the neutral interest rate.” Villeroy said.
He did not estimate the neutral rate but said markets had put it at around 2%, which suggests six more cuts by then, including two more this year and four in 2025, if the ECB continues its practice of moving in 25 basis point increments.
While oil prices rose last week due to unrest in the Middle East, Villeroy said the ECB is inclined to weather such shocks, provided they are temporary and do not feed into underlying prices.
“Victory over inflation is on the horizon, but this is no reason to become complacent and relax on a predetermined path,” Villeroy added.