(Bloomberg) -- The European Central Bank must be careful not to undershoot or overshoot its inflation target as it continues to gradually cut interest rates, Bank of France Governor Francois Villeroy de Galhau said.
“Unlike the US, we don’t have a dual mandate — prices/employment — but we have clearly a symmetric mandate around our 2% target,” he said according to prepared remarks for a speech at the Eurofi conference. “We must be attentive to the risk of undershooting our target as much as to the risk of overshooting it.”
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Villeroy’s comments come a day after the ECB reduced its deposit rate by 25 basis points but gave little indication on future moves, with President Christine Lagarde avoiding a commitment to a monetary-policy path.
Money markets now put the chances of another cut at the October meeting at 20% — down from about 40% earlier this week. People familiar with the situation said the door isn’t fully closed to another cut in October, but it’s unlikely.
“We should continue to reduce gradually and as appropriate the degree of restriction of our monetary policy,” Villeroy said. “But the pace has to be highly pragmatic: we are not pre-committing to any particular rate path, and we keep our full optionality for our next meetings.”
The extent to which a deterioration in economic growth relieves price pressures will be a key element determining how fast the ECB moves.
Villeroy said the latest data on economic activity have been “somewhat disappointing,” with growth coming mainly from public spending and exports. On inflation, he said that the ECB didn’t change its outlook for headline numbers, but market expectations are significantly lower.
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