(Bloomberg) -- The European Central Bank must be agile with further interest-rate cuts to avoid the risk of acting too slowly, according to Governing Council member Francois Villeroy de Galhau.
The Bank of France chief said persistently too-strong inflation is no longer the “sole and dominant risk” for the euro area as there’s equally the opposite risk of undershooting the 2% target — especially if growth remains sub par. The latest figures show inflation could be at that level in early 2025, he said.
“We are not behind the curve today, but agility should prevent us from running such a risk in the future,” Villeroy said in a speech at New York University. “The risk of reducing too late our restrictive stance could indeed become more significant relatively to the one of acting too quickly.”
The ECB cut rates for the third time this year last week as inflation slowed faster than expected and the economy showed signs of weakness. While officials didn’t specify when or how quickly borrowing costs will be decreased from here, investors are betting on a flurry of moves at future meetings, starting with at least a 25 basis-point reduction in December.
Villeroy said it’s too early to tell where policy will ultimately settle next year. But he cautioned against keeping rates unnecessarily above neutral — a theoretical level that neither stimulates nor restrains the economy.
“If we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reasons for our monetary policy to remain restrictive, and for our rates to be above the neutral rate of interest,” he said. “When victory against inflation is in sight, monetary policy shouldn’t inflict excessive or prolonged restraint to activity and employment, and hence to our fellow citizens.”
Villeroy said the ECB should also becoming more forward looking, based more on forecasts rather than relying on current data. While that indicates a shift, he said it would still not mean pre-committing or forward guidance.
“Between these two sides of the spectrum, there is soft signaling, whereby the central bank makes clearer its reaction function,” he said. “Such soft signaling is our everyday life business, while the two other forms — no signaling and forward guidance — should be the exceptions.”
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