(Bloomberg) -- The Bank of France cut its forecast for French inflation next year to well below the European Central Bank’s 2% target, adding to signals encouraging policymakers to pursue interest-rate cuts.
The pace of annual price increases in the euro area’s second-largest economy will ease to 1.5% on average in 2025 from 2.5% in 2024, the Bank of France said in its September economic forecasts. That’s lower than the 1.7% it predicted in June, due mainly to expectations of weaker electricity prices.
The Bank of France expects the rate to rise to 1.7% in 2026, it said on Tuesday.
The forecasts were prepared for the ECB’s meeting last week when policymakers lowered the key deposit rate by 25 basis points and said the pace of future moves would depend on data and be determined meeting-by-meeting.
Bank of France Governor Francois Villeroy de Galhau has echoed that approach, but also said the ECB must be just as careful not to undershoot its 2% target as to overshoot it.
Still, the French central bank expects underlying inflation — which strips out volatile elements like energy — to remain above 2% through 2026, partly as the deceleration in services prices takes longer.
Growth Uncertainties
The central bank left its economic growth forecast for next year unchanged at 1.2% and trimmed its 2026 prediction to 1.5% from 1.6%. Speaking in an interview with French daily Le Parisien, Villeroy said businesses and households are cautious on spending and investment because of political uncertainties in France and geopolitical concerns.
“The French economy is recovering from the acute illness of the last two years: inflation,” he said. “Now, we must treat our two chronic illnesses of too much debt and not enough growth.”
He called for France’s next government, which is yet to be appointed following snap elections in early July, to renew focus on reforms that increase innovation and cut bureaucracy, at the same time as making savings to rein in debt.
To avoid hurting growth, Villeroy said the government should target a budget deficit within the European Union limit of 3% of economic output in 5 years instead of by 2027. He said most of the effort on public finances should come from spending cuts, but that taxes could also be increased, possibly via “an exceptional and reasonable” contribution from the biggest companies and richest individuals.
Asked if he has been approached about joining the government after Michel Barnier was appointed prime minister two weeks ago, Villeroy said: “I am very happy at the Bank of France and believe I am useful there to serve the general public interest.”
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