Global: ECB Likely to Cut Interest Rates in October Amid Inflation Concerns: Villeroy

The European Central Bank (ECB) is expected to cut interest rates on October 17 as sluggish economic growth raises the risk of inflation falling below its 2% target, according to French Central Bank Chief François Villeroy de Galhau. Speaking to the Italian newspaper La Repubblica, Villeroy highlighted the challenges posed by weak economic conditions and prolonged restrictive monetary policies.

The ECB has already lowered rates twice this year from record highs, and markets are anticipating further cuts, with October and December adjustments fully priced in. This comes as inflationary pressures ease more rapidly than policymakers had initially forecast.

When asked if a rate cut is likely this month, Villeroy responded, “Yes, quite probably,” noting that the risk has shifted from overshooting inflation to falling short of the ECB’s 2% goal due to weak growth.

“In the last two years, our primary risk was exceeding the 2% target,” Villeroy said. “Now, we must also consider the opposite risk—undershooting our objective because of weak growth and overly restrictive monetary policy for too long.”

ECB President Christine Lagarde recently hinted at an impending rate cut, and several policymakers have since expressed support for this move.

Villeroy also projected further reductions in the ECB’s 3.5% deposit rate in 2024, stating that the central bank could reach the “neutral” interest rate—a level that neither stimulates nor restricts growth—by 2025.

“If we see inflation sustainably at 2% next year and economic growth remains sluggish in Europe, there will be no reason for our monetary policy to remain restrictive or for rates to stay above the neutral rate,” Villeroy explained.

While Villeroy did not specify the exact neutral rate, he suggested that markets place it around 2%, implying the possibility of six more rate cuts, including two by the end of this year and four in 2025, if the ECB continues to adjust by 25 basis points at each step.

Addressing the recent surge in oil prices due to turmoil in the Middle East, Villeroy noted that the ECB tends to look beyond temporary shocks, provided they don’t significantly impact underlying price trends.

“The fight against inflation is nearly won, but that doesn’t mean we can become complacent or deviate from our planned course,” Villeroy cautioned.