French central bank chief cautious about euro zone inflation falling below ECB target

The European Central Bank (ECB) needs to adjust its monetary policy to manage the risk that inflation in the euro area falls below its 2% target, rather than above, Francois Villeroy de Galhau, President of the Bank of France, said today. He said there may be.

In a bid to stimulate the struggling economy, the ECB cut interest rates by 25 basis points on Thursday. The move comes as inflation in the euro zone fell to 1.7% in September and growth slowed, particularly in Germany.

“The risk of falling short of target in the long term is just as present now as the risk of overshooting target,” Villeroy said in a statement. “The level of monetary policy restrictions should continue to be lowered in a timely manner.”

Source: Eurozone Inflation, Trade Economics

The ECB has shifted its focus from fighting inflation to promoting economic growth. The bank maintains its stance that risks to economic growth “remain tilted to the downside.”

Real GDP growth is expected to be 0.7% in 2024 and 1.2% in 2025, 0.1 percentage points lower than in the previous survey next year. Villeroy said given the economic weakness, the ECB should cut rates further.

Source: Eurozone quarterly GDP growth rate, trade economics

ECB keeps policy rates 'sufficiently restrained'

Despite the euro zone's inflation rate being below its 2% target, the ECB has not given concrete guidance on future interest rate changes. ECB President Lagarde said on Thursday that the central bank will “maintain policy interest rates sufficiently restrictive for as long as necessary” to achieve the 2% medium-term target in a timely manner.

“We believe that the process of deinflation is well underway and that all the information we have received over the past five weeks has been pointing in the same direction, which is lower,” Lagarde said at a news conference after the event.

The ECB has cut deposit rates to 3.25% three times since June, making it the first time in 13 years that it has lowered deposit rates to such a level consecutively. The decision comes nearly a month after the Federal Reserve announced a bold 50 basis point (bp) rate cut.

ECB deposit/refinance rates 2000-2024, source: Barrons

“Continued moderate private investment and consumption, especially with the recent rise in household savings rates, justify this new rate cut,” Villeroy said.

Although incomes rose in the second quarter, “household consumption fell unexpectedly,” the ECB said on Thursday. “The savings rate in the second quarter was 15.7%, well above the pre-pandemic average of 12.9%.”

Source: Eurozone Savings Rate, Trade Economics

ECB considers geopolitics when considering interest rate decisions

Geopolitics will also weigh on the ECB's decision-making. “The pace must be determined by nimble pragmatism. In a highly uncertain international environment, we will maintain complete discretion regarding future meetings,” Villeroy said.

EU officials are concerned that Donald Trump could impose new tariffs and increase isolationism. In an interview with Bloomberg Editor-in-Chief John Micklethwaite in Chicago on Tuesday, President Trump said his proposal was about “protecting the businesses that are here.”

The military conflict in Ukraine also shows no signs of ending, and fighting in the Middle East continues to threaten regional stability and global oil shipments. However, concerns about broader conflict in the region are beginning to abate.

ECB President Christine Lagarde said on Wednesday that as the world order moves from “open trade” to “fragmented trade”, Europe, as “the most open of the major economies”, is at greater risk. He said he was exposed to.

“The world order as we knew it is disappearing,” Lagarde said in a speech to policymakers in Ljubljana on Wednesday. “Open trade is giving way to fragmented trade, multilateral rules are giving way to state-led competition, and stable geopolitics is being replaced by conflict.”

Lagarde certainly offered an optimistic message for Europe. I believe that if Europe approaches these “times of uncertainty'' with the “right spirit,'' it will be an opportunity for rebirth.

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